Banks, FDIC May Be Headed for Trouble

Article excerpt

WASHINGTON - Despite a string of record profits, hundreds of commercial banks and the government insurance fund that guarantees their deposits are far less healthy than they seem, analysts say.

The warnings are making members of Congress nervous just two months after they enacted a $50 billion, three-year bailout of the savings and loan industry.

Legislators remember all too well the reassurances they heard from regulators and industry executives while the S&L business was crumbling, and how quickly hints of trouble mushroomed into the most dire financial crisis since the Depression.

Two well-known banking economists, Robert E. Litan of the Brookings Institution, a liberal think tank, and R. Dan Brumbaugh Jr. of Stanford University, report that commercial banks, though better off as a whole than S&Ls, may be heading for trouble themselves.

Litan, appearing before the Senate Banking Committee last week, warned that about two-thirds of the reserves in the Federal Deposit Insurance Corp.'s bank fund will be needed for banks that are weak or already insolvent.

At the end of June, the FDIC's bank reserves totaled $14.5 billion. But Litan and Brumbaugh say their analysis of bank data through March shows that $9.5 billion of that is needed to cover losses at banks that are insolvent or close to it,leaving only a thin $5 billion layer of protection before taxpayers would be called on to bail out the fund.

A post-Depression record of 221 banks failed last year. So far this year, 167 have closed or required government assistance to stay open - 116 in Texas.

FDIC Chairman L. William Seidman says he expects failures for all of 1989 to be slightly below last year and to decline further in 1990.

However, a study by analyst William C. Ferguson of Irving, Texas, casts doubt on that. He said that 443 banks of 13,000 nationwide have been losing money consistently from 1987 through the first quarter of this year.

``In spite of the high reported earnings of the banking industry (overall), the picture is not as rosy as it seems,'' Ferguson said. ``If present earnings trends for these (443) banks continue, this group will run out of capital by late 1990 or early 1991.''

The banking industry disputes its critics.

``Skeptics make a living peddling a different tune,'' Nebraska banker C.G. Holthus, president-elect of the American Bankers Association, told a House subcommittee. ``We think they're exaggerating the problem. …