ITHACA, N.Y. — The Bush Administration recently presented Congress with the most important banking legislation of the last 50 years. It will reform the way banks do business. Banking organizations will be granted sweeping new powers, and banks will be permitted to establish branch networks across state lines. The largest, most powerful institutions are wildly enthusiastic. The question is whether this reform will improve the health of the nation's ailing banks.

The reform effort is called FISCCA, the Financial Institutions Safety and Consumer Choice Act of 1991. It is far different from the Administration's first effort at major reform of the banking industry--which was just smoke, mirrors and new taxes. The Administration seems serious about restructuring the industry.

Banking needs to be restructured before it becomes obsolete. Depositors and borrowers have alternatives to banks they never had before, and these alternatives are often better and cheaper. Small depositors now might have more money invested in pension funds. When these depositors need liquidity, they are as likely to put their money in money-market funds as banks. In addition, annuities marketed by insurance companies offer intense competition for a commercial bank's certificates of deposit.

Similarly, small borrowers increasingly turn to credit unions, or to companies such as General Motors Acceptance Corp., to satisfy credit needs. Large borrowers might find it cheaper to raise cash by selling commercial paper or other securities than by borrowing from banks.

In a way, without the elaborate government guarantees provided by law, bank failures of the last 10 years could be viewed as healthy examples of capitalism at work. Market forces are rewarding newer, more efficient ways of providing banking services and weeding out inefficient providers.

While the current proposal is a dramatic improvement over the first attempt, even this may be too little, too late. Moreover, special-interest groups--representing an odd coalition of insurance-industry groups, small banks and anti-development community activists--have succeeded in diluting the proposal and may be able to defeat it outright. So far, it's politics-as-usual in Washington: The winners are the special-interest groups and the politicians. The losers are consumers, taxpayers and the economy.