DaytonDailyNews.com

While a handful of lawmakers and economists floated the idea of government takeovers of struggling banks, local industry watchers say such a step would do more harm than good.

Lawmakers from both parties mentioned nationalizing as an option for dealing with a handful of the nation's most troubled banks. However, Federal Reserve Chairman Ben Bernanke, Federal Deposit Insurance Chairwoman Sheila Bair and the Obama administration all have rejected the idea.

The administration has said it will apply so-called 'stress tests' to the nation's 20 largest banks and those that fail will have six months to get their finances squared away.

Steve Wyatt, chairman of Miami University of Oxford's finance department, said the federal government has other tools it can use to stabilize troubled banks besides nationalizing them.

Wyatt said he likes the approach the British government has taken toward the Royal Bank of Scotland. In RBS' case, the bank was split into two entities — a healthy bank focused on lending and a second that owns bad assets — with the government then infusing more capital into the healthy bank.

"We ought to consider that we are not going to get out of the recession until we clean up the banking system," Wyatt said. "We have to do something to resolve that uncertainty."

Sebastian "Seb" Melluzzo, president of Citizens National Bank, said he supports the idea of testing the country's large banks, adding that all banks undergo some sort of testing, anyway.

Melluzzo said the tests likely will reveal that at least some large banks may not have the capital they need to cover the losses they would incur if the wrote down all their bad assets. In some cases, though, he is optimistic that these banks would be able to raise capital through the private markets rather than taking it from the government, he said.

Most community banks, such as the one Melluzzo runs, didn't make sub-prime mortgage loans and don't face the same problems with toxic assets as some of their large regional and national counterparts.

Melluzzo said he doesn't like the idea of the government nationalizing banks, in part because it would wipe out shareholder investments in such institutions.

"I'm not a publicly held corporation, but I do have shareholders," Melluzzo said. "I am accountable to them. The last thing in the world I want is the government owning a very large piece of our bank."