Bank bailout may cost $11 billion FDIC's Seidman gives grim banking industry outlook.

June 28, 1991|By Los Angeles Times

WASHINGTON -- The severe slump in commercial real estate is making the outlook increasingly grim for the banking industry, with several big institutions likely to fail next year, driving the federal insurance fund for deposits into a deep deficit, Federal Deposit Insurance Corp. Chairman L. William Seidman has warned Congress.

As the tide of bank failures mounts in 1992, the insurance fund, which protects deposits up to $100,000, will be badly weakened, facing a deficit of $11 billion by the year's end, Seidman said yesterday. This grim assessment was far worse than Seidman's January forecast of $4.6 billion, new evidence that there is no sign of improvement in the vacancy rates for office buildings and shopping centers financed by bank loans.

None of the nation's biggest banks -- the so-called money center banks -- is expected to fail, Seidman said after the hearing, offering reassurance without citing any specific names. But the anticipated insolvencies are likely to come among substantial institutions in the East, the region hardest hit by the deep plunge in the commercial real estate market, he indicated.

The $11 billion "pessimistic" deficit estimate for the insurance fund could grow even larger if the commercial real estate markets keep declining in California and the southeast, Seidman told the House Budget Committee.

However, California's market is still in much better shape than New England, with far fewer loans overdue or in default, and the FDIC field experts do not expect a slump comparable to the situation in New England, Seidman said.

Banks are being crippled by their heavy dependence on loans for construction and development of commercial real estate, which has become the biggest single source of business for the American banking system.

In an effort to reduce this dependence, Congress is working on legislation proposed by the Bush administration to enact the most sweeping changes in banking law since the Great Depression, giving banks the power to cross state lines without restrictions, and to enter fully into the business of securities and insurance.

The banking legislation would give the FDIC $70 billion in new borrowing authority to deal with the cost of closing failed banks and paying off the insured deposits. The money would provide the contingency support if bank failures keep accelerating.

Seidman wants a big line of credit ready because he is increasingly worried about the future. In less than six months, his pessimistic" forecast of the fund's anticipated 1992 deficit has more than doubled.

The bank insurance fund will be solvent at the end of this year, with an expected balance of $3.2 billion, only through the device of extensive borrowing, Seidman testified. Borrowing could range as high as $21 billion this year and $29 billion in 1992.

The prospects have worsened considerably since January, when Seidman told the budget committee that he would need no more than $19.1 billion this year and $19.6 billion next year.

Both the administration and Seidman insist a taxpayer bailout will not be necessary because the insurance fund borrowings from the Treasury would be repaid with premiums collected from the banking industry.

But many critics in Congress worry that a taxpayer bailout is inevitable. They argue that an extended real estate recession would send billions of dollars in loans into default, and bring the demise of many more banks. The remaining segment of the industry might be too weak to pay the hefty premiums needed to keep the insurance fund solvent. Then, only the taxpayers would be left standing to pump money into the bank deposit insurance fund, the critics say.

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