BLEEDING FROM TENS of billions in bad real estate loans, failed and wounded banks are littering the industry landscape.
The banking crisis has echoes of the early days of the savings and loan debacle mixed with memories of the Depression, when public confidence in financial institutions ebbed sharply.
Since 1984, 1,200 banks have failed, according to government regulators. This year, another 180, worth about $70 billion in assets, are expected to go bust. Moreover, big failures such as the government seizure of Bank of New England Corp. last month will be on the rise, analysts predict; they note that 10 of the nation's 48 biggest banks -- each with more than $10 billion in assets -- have low levels of the capital that provides their financial cushion against future losses.
Making matters worse, the industry's sea of bad loans and shortages of capital has contributed to the recession by forcing banks to curb lending -- "the credit crunch." And the deepening recession is threatening to pull more banks under as more loans go bad.
Against this gloomy backdrop, the Bush administration last week finally released its wide-ranging proposals for long-term bank reform -- proposals it hopes will both strengthen the industry's financial position and make it more competitive domestically and internationally.
Containing a strong dose of financial deregulation, the Treasury Department plan gives banks some brand new powers which they have long coveted, such as permitting interstate banking and letting banks get into the securities and insurance businesses.
The recommended changes would also allow industrial and commercial firms to own banks and would limit federal deposit insurance to two accounts per bank for each person.
The proposals received a lukewarm reception in Congress, with some critics worrying that there were some disturbing parallels between the call for banking deregulation at this time and the deregulation that led to the savings and loan crisis.
"This is not reform," said John Kenneth Galbraith, professor of economics emeritus at Harvard. "It is an extraordinarily obvious exercise in evasion verging at times on insanity. . . . Could anyone think the banking system would have been strengthened if Drexel Burnham had been allowed to unite with Bank of New England?"
And the new Treasury Department proposals left unanswered growing concerns about the health of the Federal Deposit Insurance Corporation's fund that protects accounts up to $100,000. The fund is at its lowest level since it was created during the 1930s, and some experts say it could go into the red next year.
In Congressional testimony last week, FDIC chairman L. William Seidman said the fund could remain solvent and failures could be covered over the next two years by increased borrowing. Mr. Seidman that as much as $20 billion might be required, which would come from increasing the deposit insurance premium banks pay to sustain the FDIC fund.
How did banks get themselves in such a fix? "For a decade or more, banks have been making questionable loans," says Robert Reich, a professor of economics at Harvard. "There will undoubtedly be more consolidations and closings."
"Some of their lending was so excessive that you wonder what those bankers were doing," says William Isaac, a former chairman of FDIC, now a banking consultant in Washington. "The first rule of banking is to diversify your risk."
Riskier types of lending, however, especially for commercial real estate, took off in the early 1980s when many of the banking industry's traditional corporate clients turned to other markets for their funds. By the end of last year's third quarter, $819.7 billion -- 39 percent of $2.1 trillion in bank loans -- were going to real estate. By contrast, according to the FDIC, only 28 percent of all bank loans went to real estate at the end of 1984.
Unfortunately, the real estate bubble finally burst. In the last two years, more and more cities have witnessed rising office-vacancy rates, emptier hotels, unsold condominiums and shopping centers without enough major tenants.
The bad real estate loans only compounded other loan problems for some banks. In the late 1970s many of the nation's largest money center banks, such as Citicorp and Chase Manhattan, lent billions to less developed countries on which they've had to take sizable losses. In addition, the banking industry also staked about $200 billion in loans to corporate buyouts and takeovers which are now increasingly going bad as debt-laden companies find themselves forced into bankruptcy.