OMB foresees failures among large U.S. banks $3.9 billion levy by FDIC to fund bailout expected

March 10, 1992|By Debra Cope | Debra Cope,American Banker

WASHINGTON -- The Office of Management and Budget has concluded that some of the nation's largest banks are insolvent and likely to fail, government sources said.

As a result, the White House agency is assuming that the Federal Deposit Insurance Corp. will have to collect some $3.9 billion from commercial banks. The levy would come on top of a premium increase expected to take effect July 1.

The OMB conclusion is not binding on the FDIC. That agency's officials and some industry experts dispute the budget office's finding. However, the OMB's position is evidence of high-level concern that some of the nation's biggest banks are in danger of needing a bailout.

"It's a shocker," said Dennis Jacobe, managing director of the Financial Research Institute in Washington. "That means that they're projecting the failure of a money-center bank."

Details of a possible special assessment were not in the Bush administration's budget proposal, which OMB released in January.

The agency presented its findings to FDIC officials at a private briefing in late January, according to interviews with staff members from the budget office, the FDIC and Congress.

An OMB official said regulatory reports and other public information show that "many large institutions are very weak." He said the agency's computer analyses showed some are insolvent and likely to fail. The OMB did not specify which.

The money to rescue banks considered too big to be allowed to fail would come on top of the premiums banks pay for deposit insurance. Bankers are bristling at the likelihood that the current premium of 23 cents per $100 of deposits will rise to as high as 30 cents at midyear.

The OMB said the $3.9 billion could be raised in a series of special assessments, the government sources said. They could begin this year at the rate of 0.6 cents per $100, and rise gradually to 3.01 cents per $100 in fiscal 1997.

The OMB has incorporated those assessments into budget projections for the Bank Insurance Fund, but the FDIC has not endorsed the idea.

"We just don't see the need for a 'too big to fail' assessment at this time," said Stanley J. Poling, the FDIC's director of accounting.

But in another warning sign for big banks, the total assets of banks and thrifts on the FDIC's problem list jumped 26 percent, to $613 billion, between Sept. 30, 1991, and Jan. 31, 1992.

The number of problem institutions fell by 10 over those months, to 1,017, meaning bigger banks were in trouble.

Until enactment of the 1991 banking bill, the FDIC called all the shots on rescues of big banks. But after years of frustration over the FDIC's seemingly erratic decisions on when banks were too big to fail, Congress imposed strict guidelines.

The FDIC must get the green light from the Federal Reserve FTC Board, the Treasury Department and the president before it can initiate a bailout for a "too big to fail" bank.

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