TIME: Almanac 1993/TIME Almanac 1993.iso/time/092490/0924207.000

Text File | 1992-08-28 | 9KB | 189 lines

                                                                                BUSINESS, Page 66

Breaking the Bank


Taxpayers beware: now the FDIC is low on cash and may need a
bailout

By RICHARD HORNIK/WASHINGTON -- With reporting by Bernard
Baumohl/ New York and Deborah Fowler/Houston


    First it was $100 billion, then $200 billion, $500 billion,
and now it's $1 trillion or more. As estimates of the cost
mounted for the bailout of the savings and loan industry, a
taxpayer's only consolation was that at least commercial banks
were safe and sound. Or were they? The way things are going,
the Federal Deposit Insurance Corporation, which insures
commercial bank deposits, may have to be renamed the Future
Disaster Inevitable Corporation. In grim testimony before the
House Banking Committee last week, Comptroller General Charles
Bowsher warned, "Not since it was born in the Great Depression
has the federal system of deposit insurance for commercial
banks faced such a period of danger as it does today."

    Bowsher, citing a General Accounting Office report, said the
failure of a single major bank or the onset of a recession
could wipe out the FDIC's insurance fund, which has only $12
billion or so on hand to cover the $2 trillion in insured
deposits in commercial banks. And if the fund was exhausted,
the government might have to provide a bailout with taxpayer
money. Just a day after Bowsher's testimony, the Congressional
Budget Office predicted that even without a recession, some 630
banks will fail over the next three years and drain the FDIC
of more than $20 billion, far more than the insurance fund is
likely to have on hand.

    Already buffeted by voter outrage over the S&L debacle,
which is expected to cost American families $5,000 to $10,000
apiece over the next three decades, Washington legislators
responded swiftly. They promised immediate measures to bolster
the insurance fund's resources by allowing regulators to boost
the insurance premiums that banks pay to cover their deposits.
"The American people have had enough of taxpayer bailouts of
our deposit insurance system," wrote Donald Riegle Jr., the
Senate Banking Committee chairman, in a letter to President
Bush. Sensitive to accusations that it aggravated the S&L mess
by delaying the cure, the Administration immediately supported
a boost in premiums to 19.5 cents per $100 of deposits in 1991,
an increase of 63% in one year.

    Amid the cries of alarm, some experts caution against
equating the banking industry's problems with the thrift
disaster. Overall, banks in the U.S. earned $26 billion last
year, while S&Ls lost more than $19 billion. "I disagree
strongly with the notion that the problem in the banking
industry resembles the early stage of the S&L debacle," says
Thomas McCandless, who follows the industry for Goldman, Sachs.

the loosey-goosey kind of overview that occurred in the S&L
industry."

    Some bankers are concerned that the government would
overreact to the problem by piling on burdensome insurance
premiums and new regulations that could make problems worse.
Says Karen Shaw, a Washington-based banking analyst: "We could
turn a safety net into a funeral shroud by wiping out the
profitability of many of these banks." Testifying before the
House Banking Committee, Federal Reserve Board Chairman Alan
Greenspan argued against any immediate increase in the insurance
premiums. Instead he favors increasing the amount of capital
banks must keep on hand as a cushion against losses, since that
safety measure might prevent many banks from failing in the
first place.

    Such steps may stave off short-term banking crises, but over
the long haul, more dramatic changes are needed. During the
past 20 years, commercial banks have been muscled out of many
of their traditional lines of business by other segments of the
financial industry. Most important, few major corporations
still borrow from banks; they float their own commercial IOUs.
When banks looked for borrowers elsewhere, they ran into one
bad risk after another, most notably the Third World countries.
Says Katherine Hensel, a banking analyst for Shearson Lehman
Hutton: "Just look at the legacy here. On the heels of the
[Third World] debt problem, other pieces of the pie are
beginning to fall apart for banks, such as real estate, LBOs
and other highly leveraged transactions. These were pieces of
the puzzle that were supposed to generate solid returns of
capital. But the pieces aren't working. The banks just never
had a period for a breather."

    The degree of many banks' distress depends on the condition
of their regional economies. Texas banks, many of which
collapsed with oil prices in the mid-1980s, are relatively
healthy now. Says Bernard Weinstein, an economist for the
University of North Texas: "The banking industry nationwide is
in trouble, but Texas is a couple years ahead of the curve. Our
economy is recovering. Our large financial institutions have
all been recapitalized. Higher oil prices will provide enough
stimulus to protect us from a recession."

    Today the real problem area is the Northeast, particularly
New England. The FDIC is opening a "liquidation" office, with
a 400-member staff, in Boston to dispose of the real estate it
expects to be stuck with as banks in the region go bust. The
Bank of New England (assets: $23 billion) "already has one foot
in the grave," says an analyst. Even the big Manhattan-based
"money center" banks are suffering from plummeting earnings and
falling investor confidence. Chase Manhattan's stock has
plunged almost 60% in the past year, to 16 5/8. Citicorp is
down about 40%, to 17 3/4. Even J.P. Morgan, widely considered
among the best managed and best capitalized major banks, has
suffered a stock-price decline of 18%, to 32 5/8.

    The long-term answer, according to most experts, is to
enable banks to restore their profitability by removing their
geographical restrictions and allowing them to enter such
lucrative financial services as insurance and stock brokerage.
As Greenspan testified last week, "A banking system that cannot
adapt to the change in competitive and technological
environments will no longer be able to attract and maintain the
higher capital level that some of our institutions need to
operate without excessive reliance on the safety net."

    In the meantime, Greenspan also urged federal regulators to
take a hint from the GAO report released last week and try to
tighten their supervision of banking operations. The report
noted that 22 of the 406 banks that failed in 1988 and 1989
never appeared on the FDIC's problem-bank list. "Banks have
been able to hide their nonperforming loans," contends Robert
Litan, a banking expert at the Brookings Institution. Such
subterfuge would be more difficult if banks were to undergo
annual on-site inspections. Until 1956 federal regulations
required two such audits a year, but by the 1980s some banks saw
an inspector only once every two years, or even less often.

    Another pressing need is for the government to modify its
costly policy of paying off all depositors -- not just the
insured ones -- in failed banks. Of the 900 banks that have
failed since 1985, fully 99.5% of deposits have been covered.
Technically the FDIC does not guarantee deposits over $100,000
or those held by foreigners, but to maintain confidence in the
banking system the government has also protected those
accounts. The problem is that banks do not pay premiums on
those deposits, so the FDIC is essentially providing the
coverage free, or eventually at taxpayer expense.

    Banking Committee chairman Henry Gonzalez and others have
recommended that the FDIC curb its implicit commitment to make
every depositor whole. But any such cutback in coverage of all
deposits must be done carefully. The dominant fear -- some
observers say obsession -- at the FDIC and the Federal Reserve
is that large depositors might become so concerned about their
money that at the first sign of trouble at an institution they
would take it elsewhere, effectively breaking the bank.
Analysts like Shaw have proposed that the FDIC restore its
"modified payout" system, under which uninsured depositors get
a prorated share of a failed bank's remaining assets.

    Early next year Congress intends to take up serious
discussions of deposit-insurance reform. Gonzalez has unveiled
a credible but controversial proposal that would limit deposit
coverage, charge deposit-insurance premiums based on the
riskiness of a bank's assets, and place some kinds of
investments off limits for insured funds. The Treasury
Department, which commissioned a yearlong study of banking
reform, is expected to deliver its report later this year. None
of the proposals will immediately solve the problems of the
American banking system, but at least everyone seems to
understand that putting off the search for a solution will just
make matters worse.