Bank Board Cracks Down on Thrifts; New Rules to Boost Capital, Reform Accounting Standards

By Easton, Nina; Garsson, Robert M. | American Banker, April 25, 1986 | Go to article overview

Bank Board Cracks Down on Thrifts; New Rules to Boost Capital, Reform Accounting Standards


Easton, Nina, Garsson, Robert M., American Banker


Bank Board Cracks Down On Thrifts

WASHINGTON -- The Federal Home Loan Bank Board on Thursday proposed a sweeping new regulatory crackdown that would force thrifts to raise more capital and would bring the industry's accounting standards more in line with those used by commercial banks.

In a final action, the board also granted the savings and loan industry broad new authority to cross state lines -- a move that was immediately condemned by the commercial banking industry.

The agency's proposal to bring the savings and loan industry closer to generally accepted accounting principles, also known as GAAP, which are set by the accounting profession, comes amid congressional criticism over relaxed accounting rules the agency adopted in the early 1980s. In using these more relaxed "regulatory accounting principles," the agency had been responding to the troubles faced by thrifts burdened with low-interest mortgages at a time when their cost of deposits was skyrocketing.

Meanwhile, a House subcommittee investigating thrift accounting practices was sharply critical of the Bank Board's use of income capital certificates to bolster the net worth of troubled institutions.

Rep. Ron Wyden, D-Ore., charged that investors had been misled in a recent stock offering because a form of the certificates were counted as equity. The Bank Board had supported the inclusion of the certificates as equity in Columbia First Federal Savings & Loan Association, Washington, D.C. The agency reversed its position following ad adverse ruling from the accounting industry's rule making body.

William Black, senior associate general counsel to the Bank Board, said after the hearing that the Federal Savings and Loan Insurance Corp. -- an agency of the board -- will consider whether it should provide cash to Columbia in order to meet the Financial Accounting Standard Board's objections.

During its open meeting, the three-member Bank Board proposed:

* Requiring that all financial reports filed with the agency be prepared in accordance with GAAP.

* Raising the industry's capital requirement from 3% to 6% of liabilities over a six-year period. That 6% figure could be adjusted slightly up or down, depending on the riskiness of a thrift's activities, but could not go below 5%. Under the risk-based system, more capital would be required for activities such as direct investment, land or construction loans, and letters of credit than for liquid assets and mortgages. If adopted, the new capital requirements would take effect Oct. 1.

The move to raise capital requirements had been expected, and has broad support within the savings and loan industry.

* Sweeping new restrictions on what the Bank Board called nationwide lending by federally insured thrifts. Under the proposals, the agency would forbid troubled thrifts from making or purchasing loans outside their "normal lending territory" without prior regulatory approval. A healthy thrift would be permitted to purchase loans originated outside its territory -- but only if the total level of those loans don't exceed its net worth.

In addition, the proposal also would place stringent requirements on the purchase of loan participations -- or portions of whole loans -- by thrifts.

Federally guaranteed loans, such as those backed by the Federal Housing Administration, would be exempt from the proposal.

* Requirements for increased liquidity.

The commercial banking industry criticized the agency's new interstate policy because it permits federally chartered thrifts to move into as many as four other states -- which do not have to be in the same region -- for the price of acquiring a failed institution.

"They've found a way to sell off brain-dead thrifts, but the casualty is the structure of banking in this country," said Kenneth Guenther, executive director of the Independent Bankers Association of America. …

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