Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, January 23, 1994 TAG: 9401220238
SECTION: ECONOMY PAGE: EC-9 EDITION: METRO
SOURCE: JOHN M. BERRY THE WASHINGTON POST
DATELINE: WASHINGTON LENGTH: Medium
Only a year or two ago, some banking experts and government officials were predicting that hundreds more commercial and savings banks, including a few big ones, were going to fail - and that taxpayers would have to shell out tens of billions of dollars to protect insured depositors, just as they had in the earlier wave of savings and loan failures.
Low interest rates, a stronger economy and stabilization of the value of properties against which banks had lent money all have played a role in the dramatic improvement in the banking industry's fortunes. The turnaround has been so rapid that some teetering institutions have been saved and only a few are likely to fail in the next few years, according to industry analysts and government regulators.
A surge of bank failures began in the mid-1980s, peaking at 206 in 1989. Since then, the total has dropped year by year, with 42 banks closed last year. Only six of those failed in the last three months of 1993.
More important, the size of the banks that are failing also has gone down sharply. The 42 that were closed last year had a total of $3.8 billion in assets, a far cry from $45 billion in 1992 or 1991's record $63.1 billion.
The Federal Deposit Insurance Corp., which insures depositors' accounts up to $100,000, estimates that last year's failures will cost the FDIC's Bank Insurance Fund $470 million. When it shuts a bank, the FDIC takes over its assets, usually loans for the most part. The insurance fund's ultimate loss from each failure depends on what the assets bring when the FDIC later sells them.
That estimated loss was a small fraction of the insurance fund's $6 billion in income from the premiums paid last year by banks on their insured deposits. Most banks directly or indirectly pass on those premiums to depositors, often in the form of higher fees.
By law, the FDIC must keep its premiums, about one-quarter of a percentage point of insured deposits, until the insurance fund builds up a cushion equal to 1.25 percent of the total deposits covered by the fund. Using a pessimistic assumption that banks with $115 billion in assets will fail over the next five years, with actual losses to the fund of $14 billion, the FDIC officially projects that the fund won't have the required cushion until the end of 1998.
Some analysts, such as Bert Ely, a former Roanoke bank consultant now working in Alexandria, say such an assumption is ridiculous given the healthy state of the banking industry. Ely predicts that the Bank Insurance Fund will have so few losses that it will be fully funded sometime next year.
In a speech to the American Bankers Association in November, acting FDIC Chairman Andrew C. Hove Jr. sounded as if he may agree with Ely.
Hove told the bankers gathered in San Diego that "America's bankers truly have a cause for celebration this year. Earnings are up; poor quality assets are down. Banking is having its best year ever."
Earlier estimates of losses to the Bank Insurance Fund - including those made by the FDIC - were greatly overstated, Hove said. He did not say whether the latest projections, made in mid-1993, also are overstated.
But at the end of 1991, estimates of the insurance fund's likely future losses were so high that the fund was shown to be in the red by about $7 billion. The fund was not short of cash, because it borrowed working capital from the Federal Financing Bank, an arm of the Treasury. And after a bitter debate in Congress, an additional $30 billion line of credit was established at the Treasury.
Hove reminded his listeners that the FDIC has never had to tap that line of credit and has repaid all the working capital it had borrowed from the Federal Financing Bank.
"Your Bank Insurance Fund is free of debt," Hove said. "Not one penny of taxpayer money - let me repeat that, not one single cent - has been used to resolve banking problems. I think we all have a right to be very proud of that."
Roger Watson, director of the FDIC's division of research and statistics, said he doesn't disagree with his boss's assessment of the health of the banking industry. So why the pessimistic assumptions about losses in coming years?
"The real reason is the difference between a set of assumptions used in premium setting and forecasts of what will actually happen," Watson said.
The FDIC uses a backward-looking type of analysis in its projections that may not be appropriate now, he said.
If the pace of failures doesn't turn up again - and Watson does not believe it will anytime soon - he agrees that the insurance fund will be recapitalized before the end of next year.
Whenever that time comes, the FDIC will lower the insurance premium it charges. So by the beginning of 1996, bank customers may be prodding their bankers to pass on the savings when the premiums go down.
by CNB