FDIC may be insolvent by end of the year

August 24, 1991|By New York Times News Service

The General Accounting Office said yesterday that the Federal Deposit Insurance Corp.'s financial condition was weaker than previously estimated and that the deposit insurance agency would need additional money from the government within a few months.

By the end of the year, the bank insurance fund "will likely be insolvent" but will still have the cash needed to pay depositors of failed banks, the accounting office said.

The report by the GAO, an investigatory arm of Congress, showed that at the end of last year the FDIC fund covering bank deposits had a balance of $4 billion, less than half the $8.2 billion previously reported by the FDIC.

The revised figure, which was endorsed by the FDIC, came after both agencies agreed that additional reserves were needed to cover losses expected in 1991 from troubled banks.

FDIC Chairman L. William Seidman said late last month that the specter of insolvency was near enough that Congress should act before the end of October to replenish the fund, which protects deposits up to $100,000.

The fund could be insolvent but still have the cash to pay depositors because the standards for insolvency include losses

that are expected from weak banks that are likely to fail but have not yet been closed.

Although warnings about the insurance fund's deteriorating financial condition are not new, yesterday's report alarmed some lawmakers.

Representative Henry B. Gonzalez, D-Texas, chairman of the House Banking Committee, said that "if it is necessary to preserve the integrity of the deposit insurance system" he would push to give more money to the insurance fund before passing the banking-overhaul bill, which includes help for the FDIC.

Passage of the banking bill, which includes proposals to allow banks to enter new businesses and branch nationwide, is not expected before late November, perhaps too late for the FDIC to continue operating comfortably while closing the most troubled banks.

Representative Charles E. Schumer, D-N.Y., another member of the House Banking Committee, said that it would be difficult for Congress to pass the banking bill quickly enough to help the FDIC because "many members, including myself, are troubled by the idea of letting banks expand into new businesses, using insured deposits."

He said that not enough safeguards had been proposed to prevent the loss of insured depositors' money in new lines of businesses.

The revision of the insurance fund's balance to $4 billion at the end of 1990 means the FDIC expects to set aside $7.7 billion to handle bank losses this year. The FDIC fund had a balance of $18.3 billion as recently as 1987, but it has been rapidly reduced by bank failures in Texas and New England.

An FDIC spokesman said that in the past the FDIC subtracted money from its fund balance based on expected losses at banks with which it was already discussing a closing or which other regulators had said would be closed.

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