Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, February 5, 1991 TAG: 9102050140
SECTION: BUSINESS PAGE: B-7 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
The administration, in its proposed 1992 spending plan, projects that the annual cost of financial-institution failures will total tens of billions of dollars this year, next year and the year after that.
Only in 1994 will the administration's proposed reform package start to restore the financial system's health, according to the budget projections. The Treasury Department plans to issue a 550-page study today detailing its reform recommendations.
White House Budget Director Richard Darman blamed bank and S&L bailouts for a third of this year's projected record deficit of $318 billion.
The figures get only slightly better in 1992 and 1993: The budget projects spending $89 billion for bank and S&L failures in 1992 and $45 billion in 1993. The costs were $112 billion in 1991 and $58 billion in 1990.
Bush's budget says the cost of deposit insurance "can be reduced to an acceptable level only by giving banks, thrifts and credit unions the opportunity to operate safely and profitably."
"Without fundamental reforms . . . the deposit insurance system will continue to encourage excessive risk-taking," the budget said.
Nevertheless, the Treasury Department is retreating from one of its key reform proposals in the face of fierce lobbying from small-town bankers.
According to industry sources, the department originally intended to limit deposit insurance to $100,000 per person, regardless of the number of accounts or institutions the individual used.
However, executives of smaller banks complained this would encourage depositors to place their money only in the nation's largest banks, which are thought to be so big that the government would bail out all depositors to avoid shocking the financial system.
The proposal has been considerably watered down. A year after enactment, insurance would be limited to $200,000 per institution: $100,000 for a retirement account and $100,000 for other purposes.
As under current regulations, depositors could obtain virtually limitless insurance by dividing their money among several banks. Still, the reform proposals would be somewhat more restrictive than current rules that allow a couple with one child to insure up to $1.2 million at a single institution by using a combination of single, joint and trust accounts.
Other reforms seek to bolster banks' profitability by allowing them into the securities and insurance businesses; lifting restrictions on interstate banking; and permitting commercial firms such as Sears, Roebuck & Co. and Ford Motor Co. to purchase banks.
"By 1994, it is anticipated that deposit insurance reforms and the new regulatory structure of financial services will begin to improve industry profits," the budget said.
Until then, "bank failures and insurance fund losses are likely to remain high for the next few years," it said.
As expected, the budget warned that the fund insuring commercial bank deposits will slip $2.2 billion into the red next year and $22.2 billion by the end of 1996.
It said the fund needs an infusion of $25 billion. Banking trade groups, under the administration's guidance, are struggling to come up with a plan for banks to supply the money. But some private economists warn that taxpayers will have to pay the bill, just as they have for the S&L bailout.
The bailout figures for S&Ls in the budget include short-term borrowing, which the administration anticipates repaying as it sells loans, real estate and other assets inherited from failed thrifts.
Late in fiscal 1989, Congress appropriated $50 billion to cover losses in bankrupt S&Ls. The administration is asking for $30 billion more to finish the 1991 fiscal year.
The budget document revealed that the administration anticipates asking for an additional $33 billion in 1992, bringing the total to $123 billion. It also said the administration wants to extend the life of the bailout program by 13 months to September 1993.
The Senate Banking Committee scheduled a vote today on the $30 billion request for this year.
by CNB