BOSTON -- In an effort to help revive the region's sinking economy and ease the credit crunch, banks facing the threat of government seizure may for the first time be allowed to draw cash from the federal deposit insurance fund before they fail, the nation's top banking regulator told New England's governors Friday.
At a hastily arranged summit in Boston last week, L. William Seidman, chairman of the Federal Deposit Insurance Corp., reassured the governors that he is investigating various avenues to direct capital into shaky banks to shore up their financial condition.
The yearlong credit crunch in New England has choked lending and contributed to sinking finances at many of the region's major banks, some industry and legislative officials believe.
The governors said Friday that they want to prevent future bank failures in their states, but to do that they need ways to get more capital into the cash-starved institutions.
"We're most interested in that, too," Mr. Seidman said. "If credit isn't available, the economy will not do well. And if the economy does not do well, we'll have more bank failures."
Mr. Seidman said a bank-funded plan to help institutions before their troubles get too deep could save the FDIC money in the long run and would ease the credit crunch as the recapitalized banks make more loans.
The meeting between Mr. Seidman and the governors occurred against the backdrop of a regional banking crisis punctuated by the failure a week ago of Bank of New England, the nation's 33rd-largest bank. The FDIC, which insures the nation's $2 trillion in commercialbanking deposits, is operating the bank until a new owner is found.
Mr. Seidman said the FDIC has identified about 1,000 troubled banks out of the 12,900 banks it insures, and said a disproportionate number of the problem institutions are in New England. He said, however, that he does not anticipate a failure the size of Bank of New England's as long as the recession is "short and shallow."
Several plans are in the works to improve the capital positions at many banks in the country, Mr. Seidman said, most involving matching private capital with FDIC funds.
"We have been talking about developing a plan of early action . . . that may enhance credit and prevent failures," Mr. Seidman said at State House news conference. "It would be a combination of FDIC and private capital."
Since Bank of New England began its historic slide a little more than a year ago, banking industry officials and legislators have criticized federal regulators for not responding early enough to correct the problems inside the nation's banks and then for acting too harshly when they finally responded. Some have accused the regulators of causing thedrought in lending by forcing banks to set aside huge amounts of money as protection against loans that may or may not go bad.
Mr. Seidman conceded that some regulators have been "overzealous," but he said he doubts that a handful of bank examiners could have created the region's current economic problems.
"I asked the governors to let me know if they saw instances where their constituents were not being treated fairly," he said. "But we're not interested in trying to cover up the problems through improper accounting."