Regulators scoff at huge bank bailout

October 27, 1992|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON -- Federal regulators discounted the prospect of a multibillion-dollar taxpayer bailout for the banking industry yesterday, but admitted that many banks still faced major problems, including shaky real estate loans and risky interest rate spreads.

"I don't see a major calamity of the kind that hit the savings and loans," said John P. LaWare, a Federal Reserve governor, testifying before a Senate Banking Committee hearing that Republicans condemned as politically motivated.

"Large savings and commercial banks may be closed in the months ahead, but in general the turnaround in the banking industry seems well under way," he said.

Treasury Secretary Nicholas F. Brady, in a statement issued to reporters in the hearing room, accused the committee's Democratic chairman, Sen. Donald W. Riegle Jr. of Michigan, of calling the rare post-adjournment session "to jump on the bandwagon of the fearmongers and doomsayers who are using old data and flawed analysis as an election year gimmick to claim our nation's banking system is in trouble."

Mr. Riegle said in his opening statement that the condition of the banking industry was of "vital concern" to the public, adding: "There are many different explanations of what is occurring. Some say the industry is healing itself. Others say it is on the brink of a major crisis."

The stability of the banking industry has been thrown into question by a recent book, "Banking on the Brink," by Roger J. Vaughan and Edward W. Hill, and other analyses predicting mass bank failures when new federal regulations are implemented Dec. 19 requiring banks with less than 2 cents in capital for every $1 of assets to be closed or sold. Previously, banks had to be insolvent before action could be taken against them.

Both President Bush and Arkansas Gov. Bill Clinton sought to calm public concern over an impending crisis when questioned about the state of banking during their final debate.

And yesterday, the country's three top federal banking regulators took turns in playing down the risk of a thrift-like crisis in the industry. They stressed that bank profits in the first half of the year were at their highest annualized rate since World War II; 97 percent of banks were well capitalized; the average equity-to-assets ratio is currently 7.23 percent -- the highest level since 1966; favorable stock market ratings had allowed the 50 largest banking companies to issue a record $14 billion of common and preferred stock during the past two years; and the commercial real estate market was firming.

The regulators were Mr. LaWare, Andrew C. Hove Jr., acting chairman of the Federal Deposit and Insurance Corp. (FDIC), and Stephen R. Steinbrink, acting comptroller of the currency.

Mr. Steinbrink, who oversees 3,700 banks with two-thirds of all banking assets, said: "The facts simply don't support claims that a large proportion of the industry is on the brink of insolvency."

They all acknowledged that the pace of bank closures would accelerate after implementation of the tougher regulations, but denied this would amount to a "December surprise." At midyear, 230 federally insured commercial banks were undercapitalized, but only 50 with assets of roughly $8 billion would have failed to meet the new 2 percent standard, the FDIC said.

Mr. Hove said the FDIC expected between 100 and 125 banks with assets of $76 billion to fail next year, compared with between 100 and 120 banks with assets of $37 billion this year. Mr. Hove acknowledged that bank closures this year were far short of the FDIC's own "grim projections," but denied any conspiracy to delay action until after the election.

"The casualty list has still been extremely high," he said, adding: "Events have worked in our favor, but I want to stress this morning the banking industry's problems are not behind us."

Edward J. Kane, professor of finance at Boston College, said banking was in "a mess" rather than "a crisis."

"The economic condition of crippled banks today parallels that of an AIDS victim who has been lucky enough to get over a bout of pneumonia. Although each crippled bank has received a welcome gift of time," he said, "its condition remains terminal."

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