THE FEDERAL Deposit Insurance Corp. moved quickly and prudently to assuage panicky depositors worried about their funds in the Bank of New England. In two days, withdrawals totaled $1 billion, prompting the agency to take over the bank's operations in Massachusetts, Connecticut and Maine. Jittery depositors appear to have a new sense of confidence now that their deposits are in government hands and fully insured.
That has stopped any prospect of a run on the bank -- the third largest bank failure ever -- that might have spilled over onto other healthy banks whose depositors might have also decided to withdraw and opt for the money-in-the-mattress route.
From the West Coast comes a fair question: What does this all mean for us, and the rest of the country? The Bank of New England is a regional bank reflecting economic problems of the Northeast. Most banks in the United States are in good shape and not facing the magnitude of loan problems that brought down the Bank of New England. The FDIC's move has helped to stabilize the Northeast, where just last week Rhode Island temporarily closed 45 banks and credit unions because of a defunct private insurance system.
But the collapse of the Bank of New England raises once again the pressing need for an overhaul of bank regulations, which the Bush administration is expected to set forth soon. Headline after headline in recent months have put the spotlight on banks weakened, especially in the Northeast, by a rising volume of problem real estate loans. Banks certainly are in far better shape than savings and loans, but the myriad of bank problems leave one uneasy about FDIC's slim $9 billion bank insurance fund which insures an estimated $2 trillion in bank deposits.
The FDIC, which needs more funds, is expecting 170 bank failures this year, about the same as last year. "We expect more failures, but none at this time of the size of the Bank of New England," William Seidman, head of the FDIC said.
The FDIC initially pumped $750 million into the Bank of New England's three banking units. The rescue ultimately will cost the FDIC an estimated $2.3 billion. The agency is covering all deposits, even those exceeding the $100,000 limit on insured accounts. This so-called "too-big-to-fail-policy" of protecting all deposits helps keep depositor confidence high. But the policy has been applied unevenly; the FDIC did not do the same in the collapse of Freedom National Bank of New York, one of the largest minority-owned banks.
But such piecemeal remedies fall far short of major changes needed to update the rules that have governed the banking industry since the 1930s. Certainly, banks pay the premiums for the FDIC's bank insurance fund, but it is ultimately the consumer who pays: through higher banking fees, and, if the banks' woes continue unchecked, a deepening credit crunch and high interest rates.