The Treasury Department has proposed major banking reform legislation that, despite its promise, could be economically devastating if implemented at the wrong time.

It is disturbing that the advantages and dangers of the legislative proposal are taking a back seat to a fight among government agencies over bureaucratic turf.The Treasury's plan would turn state-chartered banks, currently regulated by the Federal Deposit Insurance Corp., over to the Federal Reserve. Banks with national charters, their holding companies and savings and loan associations would be under the Treasury's jurisdiction.

FDIC Chairman William Seidman called the proposal "very dangerous" and "an invitation to regulatory civil war." Others see it as a grab for power by the Treasury.

Apparently, the reform would give national banks more freedom to have branches across state lines than state banks. This, together with the expectation that the Federal Reserve would be a tougher supervisor than the Treasury, could

result in state-chartered banks seeking national charters, thus enlarging the Treasury's regulatory power.

It is only to be expected that government policymakers would be primarily interested in the impact of the reform on their own power. However, it is the impact of the reform on the economy that is most important, and both policy-makers and the general public need to know what that impact could be.

Banks that are well-capitalized would pay lower deposit insurance premiums, endure less regulation and be permitted to engage in new, hopefully lucrative, activities. Less well-capitalized banks would automatically find themselves at a competitive disadvantage that could be fatal.

A large number of banks could fail as a result of the reform legislation itself. This, of course, could push the FDIC deep into the red, just as S&L failures bankrupted the savings and loan deposit insurance fund. The result could be an even larger federal budget deficit requiring another massive taxpayer bailout.

At this time, with recession, declining real estate values and unresolved savings and loan problems, it would be disastrous to have a comparable problem with commercial banks. It would reduce the liquidity of the banking system and its ability to lend.

Currently the Federal Reserve is trying to end the recession by providing banks with reserves to support a credit expansion. However, reserves alone are not enough. Banks must also have enough capital to allow them to make new loans and still meet required ratios of capital to loans. If the banks lack adequate capital, the Federal Reserve cannot engineer a credit expansion.

Today many banks are under pressure to restrict their lending in order to boost their capital-to-loan ratios. Unable to attract new capital, they reduce their loans.

The new capital-based supervision proposed in the banking reform would give banks many more reasons to reduce the loans on their books, thus frustrating the Federal Reserve's efforts to spur a credit expansion. The longer the recession lasts and the more severe it is, the more real estate problems will drag down financial institutions.

It would be wise for the government to first stabilize real estate values and get the economy back on its feet before it puts new pressures on the banks.

(Paul Craig Roberts is the William E. Simon professor of political economy at the Center for Strategic & International Studies in Washington and is a former assistant secretary of the U.S. Treasury.)