Devaluation of Faith

After more than a generation of stability, most of the Western world's bankers and the men who regulate their operations were smugly convinced that the financial chaos of earlier decades was forever behind them. Now, a recent string of bank failures and losses in both the U.S. and Europe has jolted public confidence and raised troubling questions about the supervision, efficiency and even the honesty of international banking. Last week the European financial community received two more shocks. Jittery depositors drew so much money out of Vienna's small Allgemeine Wirtschaftsbank that it was forced to shut down. Much more important, Lloyds Bank, Ltd., one of Britain's most prestigious, disclosed that its branch in

Lugano, Switzerland, had lost a walloping $79 million because of "unauthorized foreign exchange dealings."

Lloyds, one of London banking's Big Four with assets of more than $1 billion, is in no danger of failing. Indeed, the bank promised to honor all obligations of the Lugano branch so that depositors and creditors will lose nothing.

Meanwhile, the branch manager and money trader, both Swiss, have been suspended and could face criminal charges. Lloyds officials uncovered the losses only after a chance phone call from another banker, curious about the heavy volume of currency trading being done by the small Lugano branch. It appears that the branch officials were seeking to turn a profit--whether for themselves or the bank is not clear--by speculating in Deutsche Mark and dollars without reporting their trades on the books. Apparently, after losing on some initial misguided trades, they wagered more and more of the bank's money trying to recoup, and the losses snowballed.

The incident points to the biggest reason for recent bank troubles. There are other causes: growing public distrust of paper money, runaway world inflation, and the tricky task of absorbing and relending vast amounts of money flowing from newly rich oil-producing nations. But the main source of instability has been the temptations offered by floating international currency rates.

For traders who guess right, wide swings in currency values contain the potential for big profits, but for those who bet wrong, the losses can be devastating.

More Failures. So far this year, New York's Franklin National Bank has reported losses of $83 million, resulting largely from currency trading. In Germany, the big Bankhaus I.D. Herstatt dropped so much cash that it went under; it was followed in quick succession by four smaller banks. Even the staid Union Bank of Switzerland has reportedly had to cover shortages of $50 million lost playing currency roulette.

Moneymen fear that more failures could be in the offing. Says one banker: "In a typical day, 1,000 slips of paper might change hands in a foreign exchange department. If a trader wants to hide something, there is little we can do."

Government regulators are now belatedly cracking down. The German government, which has been particularly lax in supervising its banks, has proposed a new set of regulations that could force the closing of any bank that loses an amount equal to 50% of its capital.

More important, the government will make up all losses suffered by depositors, whose savings can presently be wiped out when their bank fails. Still, governments maintain that they cannot do the whole job; bank managers themselves must tighten up their operations.

The alternative is all too clear. In today's skittish financial climate, the nightmare of a mass run on world banks is no longer unthinkable.

This file is automatically generated by a robot program, so viewer discretion is required.