Banking regulators say don't expect mass closures

December 19, 1992|By David Conn | David Conn,Staff Writer

That deafening silence heard throughout Maryland and the nation today is the sound of bank and thrift doors remaining open.

Despite months of dire warnings that hundreds of banking companies might be shut following the presidential election -- including a mid-debate caution from candidate Ross Perot -- federal agencies say there was no reason to fear a "December surprise." They say they have no intention of seizing large numbers of financial institutions in the wake of today's well-publicized deadline, which forces regulators to act against weak banks and thrifts.

That's partly because many of the weakest institutions already have been taken over and a sharp drop in interest rates in the past year has allowed banks and thrifts to lower their costs and raise their profits.

The deadline stems from the year-old Federal Deposit Insurance Corp. Improvement Act, or FDICIA, which requires regulators to take "prompt corrective action" toward the weakest companies under their supervision, those with insufficient capital.

Capital is the cushion of money that financial institutions must keep reserved to protect their owners and the federal deposit insurer against possible losses, or collapse.

The new law gives regulators up to 90 days to take over banks and thrifts that are "critically undercapitalized," meaning capital is less than 2 percent of assets, a number also known as the leverage ratio.

But it also allows the companies to petition their regulators for as many as three 90-day extensions, if they have reason to believe their finances are improving.

After several months of federal takeovers, only a relatively few of the nation's banks and thrifts still remain in the lowest category. Three Maryland thrifts -- Potomac Federal Savings Bank, Standard Federal Savings Bank and Second National Federal Savings Bank -- have been seized since August.

But the new law also will affect the way federal deposit insurance works. Starting today, there will be an important limit on the scope of insurance for some employee benefit plans, such as pension and 401(k) plans, according to Federal Deposit Insurance Corp.'s Caryl Austrian.

After today, for "undercapitalized" banks and thrifts, those with less than a 4 percent leverage ratio, federal deposit insurance will cover employee benefit accounts only for the first $100,000 in the entire company's combined account, Ms. Austrian explained. Before, the insurance covered up to $100,000 for each employee's account.

The new rule applies to deposits made after today, and to existing accounts the next time they mature, such as a certificate of deposit's next maturity date.

While today's deadline may be "the December dud," as Alexandria, Va., banking consultant Bert Ely calls it, the new law puts added pressure on the institutions with between 2 percent capital-to-assets ratio and the legally required 6 percent.

Regulators "can effectively force these people to find a [merger] partner," said Rockville consultant Arnold G. Danielson.

Some banks have other plans. Towson-based Bank Maryland Corp., whose main unit is the Bank of Maryland, has a 4.26 percent leverage ratio, which is below the 6 percent minimum. But President and Chief Executive Officer H. David Schumpert said his company has asked the FDIC for permission to restructure some of its assets so they will contribute to the capital ratio.

The Bank of Baltimore has been raising capital through the sale of stock to its shareholders, $3.2 million worth so far this fall. It also has shed almost $700 million of assets this year in an effort to meet its regulatory requirements, according to Treasurer David Spilman.

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