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FDIC warns new rules may speed bank closings

THE BALTIMORE SUN

The Federal Deposit Insurance Corp. warned this year that 200 banks with combined assets of more than $80 billion would fail in 1992. After seven months, however, only 70 banks with $20.9 billion in assets have failed.

But even as banking experts debate how much the slowdown stems from election-year politics and how much from the palliative effects of the lower interest rates that make even the weakest banks more profitable, the FDIC is warning that tougher new regulations that will take effect Dec. 19 will result in a flurry of bank closings.

After Dec. 19, regulators must start closing banks whose shareholder capital drops below 2 percent of assets or provide LTC good reasons why they are letting them stay open. A good reason, FDIC officials say, would be a viable plan for a merger or an infusion of capital.

Under current law, state and federal regulators do not usually close banks unless they are insolvent, meaning the value of the bank's assets, such as loans and securities, is lower than the combined total of its capital and what it owes depositors.

"The idea is to close institutions while there is at least some theoretical value left," said Robert F. Mialivich, assistant director for bank supervision at the FDIC. "If you wait until the bank has zero capital, it has long been proved that it has a negative value as soon as it is closed."

The 2 percent rule, which was part of the banking legislation passed late last year, is intended to reduce the FDIC's losses from failed banks.

William Taylor, chairman of the FDIC, estimates that, based on theagency's latest information, a number of banks with assets of $30 billion to $45 billion will be affected by the rule changes, though he will not disclose how many.

Ferguson & Co., an Irving, Texas, consulting business, found that 54 banks with a combined $17.3 billion in assets failed to meet the 2 percent test, based on public reports filed by banks March 31.

Despite the predictions of many more closings at the end of this year -- or maybe in part because of the predictions -- accusations that regulators are playing politics with bank failures remain widespread.

Rep. Henry B. Gonzalez, D-Texas, chairman of the House Banking Committee, is among those who suggest that banking regulators might be delaying the closing of weak banks to avoid controversy in advance of the November elections.

Mr. Gonzalez said in June that the slow pace of bank closingwas reminiscent of the way savings and loans were handled in 1988.

Accusations continue that regulators have been too slow to close financially shaky savings institutions. Because the Resolution Trust Corp., the federal agency that handles failed savings and loans, has lacked the money it needs to handle large failures, some institutions have remained open longer than analysts expected.

The FDIC, for its part, received an extra $30 billion from the Treasury last year for dealing with troubled banks, but it has not ++ yet used any of that money.

Some bankers noted that a policy of early intervention, under which banks are closed before they are insolvent, might not always be the least costly way for federal regulators to handle weak banks.

"It makes a lot of sense when property values and overall conditions are deteriorating," said Charles D. Jeffrey, president of the Heritage Bank for Savings, a Holyoke, Mass., bank that has a plan for raising more capital but is now below the 2 percent level.

"But at times like now, when real estate markets have stabilized and banks are benefiting from lower interest rates, it is exactly the wrong thing to do, as far as the federal taxpayer is concerned."

When conditions are favorable, Mr. Jeffrey said, the weakly capitalized banks might find fresh capital and survive, at no cost to the FDIC. But if they are closed, he said, there is still a chance the FDIC will lose money.

Some banking experts stop short of accusing regulators of bending the rules to avoid closing banks, but say regulators are more inclined to sit on their hands before an election.

"Neither party would seem to benefit from bank closings, and I think the regulators have recognized that," said Edward Furash, a Washington bank consultant.

Fred Finke, a deputy in the Office of the Comptroller of the Currency who is in charge of supervising the weakest national banks, acknowledged that "closings have been running a little slower than we expected."

But he added that there simply have not been as many insolvent banks as had been expected. "We are not doing anything designed to push the failures back beyond November," he said.

Mr. Taylor said economic factors, not politics, have kept more weak banks alive.

The biggest thing to slow down the pace of failures has been the decline in interest rates," Mr. Taylor said.

"It has had the effect of helping some banks improve their condition in a material way, while for others it has just postponed the inevitable."

Besides the benefits of lower interest rates, Mr. Finke noted that many troubled banks have already set aside reserves for bad loans or written off the loans at a loss. And banks are not facing the same steady decline in the value of their loans as they have faced for the past few years, he said.

Another cause of the slower-than-expected failure rate, Mr. Finke said, is that "there are more people out there who are thinking that maybe it is still possible to earn a return in banking."

Just as large banks have rushed to offer stock this year, he noted, smaller banks have also found it easier to restore their financial condition by issuing more stock, in small, private transactions.

Even if the FDIC or state regulators are acting cautiously because of the election, there is not much to suggest that they are denying the existence of problems -- as savings and loan regulators were doing in 1988.

Mr. Taylor, who came to the FDIC last October and whose term expires in March 1993, describes himself as a bureaucrat whose career at the Federal Reserve did not prepare him for bending to prevailing political winds.

Earlier this year, in fact, Mr. Taylor voted in favor of a sharp increase in the deposit insurance premiums banks must pay -- a sign that he was not trying to minimize the industry's problems.

Before that, Mr. Taylor pushed the FDIC to revise downward its forecasts for its own financial condition. Instead of accounting only for losses it would suffer at banks that are on the verge of failure, the agency now casts its net wider to include losses from banks that it estimates are likely to fail, even though the event is not imminent.

"I operated on the simple principle that the losses are there whether the bank gets closed today or sometime in the future," he explained.

In another indication that the FDIC is not trying to hide industry problems, early this year the agency sharply increased the amount of assets on its list of troubled banks.

Mr. Taylor has withstood the temptation to issue a more rosy forecast for the industry.

He noted that the benefits of lower interest rates would not last forever and that "when interest rates rise, as they surely will some day, it is going to kick out some banks" onto the list of those that regulators will close.

"Some people inside here are of the opinion that things are better," Mr. Taylor said, "but I am not convinced yet."

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