WASHINGTON -- The federal fund that insures bank deposits may be the next to go broke, forcing taxpayers, who already are salvaging the savings and loan industry, to bail out commercial banks, too, the U.S. comptroller general is warning.
In testimony to be given today to the Senate Banking Committee, Charles Bowsher says the Federal Deposit Insurance Corp.'s bank insurance fund lacks adequate reserves to cover the banks already likely to fail.
The number of failures will rise if the economy falls into a recession, which many economists say has become all but certain because of the oil price shocks triggered by Iraq's seizure of Kuwait.
"Over the next few years, the fund's low reserve level, accompanied by a recession, could lead to a level of bank failures that would exhaust the fund and require taxpayer assistance," Mr. Bowsher warned.
The General Accounting Office, an arm of Congress that Mr. Bowsher heads, concluded that 35 large banks were in such poor condition at the end of 1989 that they are likely to fail or fall into government hands within a year. The GAO did not name the banks.
Deposits in failed banks with FDIC insurance are protected up to $100,000. Each failure means the FDIC must dip into its diminishing insurance fund to reimburse depositors.
"I won't say the fund is bankrupt, but it is in deep, deep trouble," said a House Banking Committee aide. "If one of the top 50 banks in the country failed, the fund would be wiped out."
It is not too late to avoid another taxpayer bailout, Mr. Bowsher said. He commended the FDIC for voting recently to raise premiums to rebuild the insurance fund, suggested boosting the premiums further and recommended more thorough regulation of the banking industry.
The Senate and the House, which also is holding hearings this week on deposit insurance, are considering other remedies. They include limiting deposit insurance or charging banks different premiums based on the risks of their investments.
"Not since its birth in the Great Depression has the federal system of deposit insurance for commercial banks faced such a period of danger and uncertainty as it does today," Mr. Bowsher said in his prepared testimony, which was obtained by the Chicago Tribune.
The banking industry is suffering from many of the same ills that consumed hundreds of S&Ls over the last several years, principally loans for speculative real estate projects.
Protecting depositors at banks is getting costly. In 1988, the FDIC fund lost $4.2 billion, its first loss ever. Last year, it lost $852 million, and FDIC Chairman L. William Seidman testified in late July that the fund could lose as much as $2 billion this year.
Private economists and lawmakers say this year's loss could bemuch more than that, however.
Even before this year's loss, the ratio of insurance fund reserves to insured deposits was at its lowest level ever. The fund holds $13.2 billion, 0.7 percent of the $1.88 trillion in bank deposits the FDIC backs.
Under last year's S&L bailout legislation, Congress said the fund should have a reserve ratio of at least 1.25 percent by 1995.
To move toward that goal, the FDIC board voted in August to raise the premium it charges banks next year by 62.5 percent, to 19.5 cents for every $100 of deposits from 12 cents per $100. The higher premium would raise $4.8 billion.
Sen. Donald Riegle, D-Mich., chairman of the Senate Banking Committee, has talked about limiting insurance to $100,000 per person rather than per account.
But even if the insurance fund reached the 1.25 percent ratio, Mr. Bowsher worries that the FDIC may still come up short.
As part of its financial audits, the GAO analyzed 300 banks. These institutions included all with more than $100 million in insured deposits that were on the FDIC's problem-bank list on Dec. 31 as well as othersthat appeared shaky. In addition, the GAO examined the 100 biggest commercial banks in the U.S.
The 35 endangered banks were mostly in the Northeast and Southwest and had assets of $45.1 billion at the end of 1989. Based on previous failures, the GAO figured the banks' collapse would cost the FDIC $4.4 billion to $6.3 billion.
But because the historical data do not reflect the tremendous shift into real estate loans in the 1980s, Mr. Bowsher said, "Our cost estimates could be significantly understated."
Equally worrisome, he said, is that regulators probably are unaware of other banks in trouble. Of the 406 banks that failed in 1988 and 1989, 22 -- or more than 5 percent -- went under without ever appearing on the FDIC's problem-bank list, and nine others were on the list for only one quarter.
Mr. Bowsher said it was only regulators' on-site examinations that detected problems. This suggests the need for better regulation, he said.