Bank woes overstated, analysts say Experts, disputing comparisons to S&Ls, reject idea of 1,000 impending failures

October 21, 1992|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- When George Bush and Bill Clinton agreed in Monday night's debate that the banking system was fundamentally sound, they made news because, for once, they weren't at each other's throats. But they might also have described the banking industry's situation more accurately than the current wave of gloom and doom.

This is the conclusion of most banking industry analysts and regulators, who scoff at reports that 1,000 banks could fail within thenext few years.

Although the banking industry is far from solid, and scores of banks are expected to be taken over by the government under regulations that will go into effect in December, few see the problem as being as serious as the savings and loan debacle, which hit after the 1988 election and could cost taxpayers as much as $200 billion before interest.

"There's no comparison between the two," said Charles Clough, chief investment strategist for Merrill Lynch & Co. "The banking industry is basically strong."

Attention has been focused on a law, due to take effect Dec. 19, that allows the government to seize banks that are still solvent but have net worth equal to 2 percent of assets or less and thus, too little capital to back up troubled loans. Previously, the government could seize only insolvent banks.

The new rule is expected to result in the government takeover of about 80 banks, with assets of $30 billion.

Indeed, the Federal Deposit Insurance Corp. has warned since July that the closures are pending, and acting FDIC Chairman Andrew Hove told a meeting of the American Bankers Association that 20 of the banks will be shuttered by year's end. That will bring closures this year to more than 105, and a similar number is forecast for next year.

Spurred by a new book -- which its authors say is being misquoted by the media -- and a flurry of news reports, some pundits are predicting that hundreds of banks might immediately collapse in a scandal that could engulf the next president.

As the argument goes, nearly all the 1,000 banks on the FDIC's "problem bank list" will fail -- 8 percent of the nation's total. In addition, critics say, the FDIC is too generous in estimating a bank's assets, meaning that the banks that do fail could cost taxpayers about $100 billion.

The wave of worry culminated with the three candidates for president being asked Monday night whether they thought the banks were in a crisis.

"The banking system in this country is fundamentally sound, with some weak banks," answered Mr. Clinton.

Mr. Bush followed by saying: "It is sound. [But] there are some problem banks out there."

Ross Perot did not answer the question.

Analysts agree with the two politicians' upbeat assessment because few think that the FDIC is radically understating the banks' problems.

For example, though it sounds dramatic to say that 80 banks will immediately be seized when the law takes effect Dec. 19, not all the banks will be taken over immediately, and the procedure is relatively routine. The FDIC has already taken into trusteeship 85 banks this year, with assets of $27.8 billion, FDIC spokesman Frank Gresock said.

In fact, the situation is better today than it was expected to be a year ago, when the FDIC estimated that it would have to seize 200 banks, Mr. Gresock said. Only 85 banks have been taken over, because low interest rates have allowed banks to turn a higher-than-expected profit by borrowing money at a low rate but lending it under older, higher rates.

Felice Gelman, an industry analyst with Dillon, Read & Co. Inc., said another allegation -- that the FDIC is overestimating the value of the weak banks' assets -- is also untrue. When the FDIC seizes a bank, the assets usually yield 50 cents on the dollar, she said.

The authors of the book that has gotten so much attention assume that the assets will yield only 20 cents, thus driving up the estimated cost of a failed bank.

"The idea of a bank meltdown is ludicrous," Ms. Gelman said. "Most banks have adequate capital to cover their loans and are making money."

For their part, the book's authors say the media have taken some of their statements out of context. By putting together all of their worst-case scenarios, they said, a serious problem has been whipped up into a cataclysmic crisis. The two issued an eight-page rebuttal yesterday showing how many of their statements have been taken out of context.

"Our feeling is that our arguments have been overstated in the media," said Edward W. Hill, an associate professor of economics at Levin College of Urban Affairs at Cleveland State University and one of two authors of the just-published book, "Banking On The Brink."

"We also show that the industry has some very healthy segments."

Mr. Hill said that despite the reports that his findings concluded that the banking crisis would cost $100 billion, for example, his book states that a more probable figure is half that amount.

The reason for seizing on the banks' problems, Ms. Gelman said, might be that the media were late in reporting the savings and loan crisis four years ago. "I think they're overcompensating for their earlier mistakes," she said.

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