The government's policy of insuring all the deposits at large regional banks has contributed significantly to the financial problems of the Federal Deposit Insurance Corp., according to H. Furlong Baldwin, chairman and chief executive officer of Mercantile Bankshares Corp.
"It [the FDIC] would not be in the jam it is today," Baldwin told the bank's shareholders at the annual meeting yesterday.
The government's so-called "too-big-to-fail" policy was evident at the beginning of the year when regulators took over the Bank of New England, one of the largest banks in that region. Even though the FDIC insurance normally covers deposits of $100,000 or less, all deposits, regardless of their size, were covered at the Bank of New England.
The cost of paying all these accounts at the Bank of New England was a large part of the government's cost in the $2.6 billion bailout of the bank, Baldwin said. In fact, the FDIC has paid 99.5 percent of all the deposits in banks taken over by the government, he said.
David M. Barr, a spokesman for the FDIC, said the fund pays a high percentage of bank deposits because most of the banks taken over are merged with other banks, which assume all the deposits. He also said the FDIC only covers all of the deposits at banks that are determined to be essential to the economy of a region.
As the result of payouts by the FDIC, the $8.4 billion insurance fund will be insolvent in the next year or two, government officials predict. The fund is at its lowest level in relation to deposits in its 57-year history.
A plan pending before Congress would allow the FDIC to borrow up to $70 billion to replenish the fund. But opponents of the measure charge the loans would be the beginning of a taxpayer bailout of the fund.
If the government continues its too-big-to-fail policy, the money to cover the large accounts should come from the Federal Reserve Bank or the Treasury Department, said Baldwin. It should not come from the FDIC fund, which is supported by premiums paid by banks and intended to cover only deposits of less than $100,000. Likewise, Baldwin would exclude foreign deposits of U.S. banks from FDIC protection because banks do not pay premiums on those accounts.
Mercantile, the parent company of Mercantile-Safe Deposit and Trust Co., is considered one of the soundest large banks in the country. Despite the problems in the rest of the banking industry, the company was able to increase its profits in 1990 and in the first quarter of 1991.
The bank is the 98th largest bank in the country and its 1990 net income of $68.9 million was the 49th highest. It had the highest capital-to-asset ratio of the 100 largest banks and it wrote off the third lowest number of bad loans.
Baldwin said he expects banking problems to continue for the next six months. "It will continue to be a difficult time for the industry and your bank," he said. After the recession, he said, there will be two types of banks -- those with adequate capital and those without. Those with adequate capital will be in a position to be involved in the recovery, he said. "They will also have improved control over pricing and costs."