Statement by John P. LaWare, Member, Board of Governors of the Federal Reserve System, before the Committee on Banking, Housing and Urban Affairs, U.S. Senate, June 10, 1992

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Statement by John P. LaWare, Member, Board of Governors of the Federal Reserve System, before the Committee on Banking, Housing and Urban Affairs, U.S. Senate, June 10, 1992

Mr. Chairman and members of the committee, I am here today to discuss the condition of U.S. commercial banks, the Federal Reserve's recent efforts to implement new banking legislation, and, more generally, the Federal Reserve's efforts to promote a sound banking system. As the committee knows, the industry has experienced exceptional stress in recent years, and many institutions continue to face rough times ahead. Recent performance, however, offers genuine encouragement that conditions in the banking system are beginning to improve.

These recent years have also been challenging for the bank regulatory agencies, as we have assessed the industry's condition, developed corrective actions, and implemented legislative initiatives. The period has also been a time in which we have placed great importance on interagency coordination, as I will point out in my comments today.

I will begin by discussing the recent performance and outlook of the banking system; I will then address recent supervisory actions of the Federal Reserve, including actions taken to implement the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). I will then comment on the focus of banking legislation that the Board believes is still needed.


During recent years, conditions in U.S. commercial real estate markets and throughout the general economy have placed great strains on much of the domestic banking system. From 1985 to 1991, for example, nearly 1,200 commercial banks failed, reaching a peak of 220 bank failures in 1988. Since then, the number of failures has declined to 127 banks last year and to 55 banks during the first five months of this year. But the aggregate assets of failed banks have remained high, at $66 billion in 1991 and $13 billion thus far in 1992.

Trends for troubled institutions (those rated CAMEL 4 or 5) are also disturbing. Their number remains stubbornly high, and their assets continue to grow. More than 1,000 problem banks remained at the end of 1991. That level is roughly five times the level of a decade ago, although it is down substantially from its 1987 peak. Problem bank assets, at approximately $600 billion, are also unacceptably large and represent about 16 percent of total banking assets.

One result of these troubled times has been the depletion of the FDIC's Bank Insurance Fund (BIF), after reserving for anticipated losses. These threats and the industry's current condition make it likely that the fund will remain under great pressure for some time to come. That projection is behind the FDIC's recent determination that higher insurance premiums are needed to meet the public policy mandate that the industry repay Treasury borrowings and rebuild the fund balance.

The problems of banks in the past few years can be traced to conditions that prevailed a decade or more ago. Many of the industry's largest institutions entered the early 1980s holding high levels of weak developing-country loans and facing growing competition from thrift institutions and foreign banks, as well as from securities firms that were helping prime borrowers sidestep their banks. In addition, banks in the Southwest were holding deteriorating energysector credits and searching desperately for an important new source of earnings. These banks, along with many others, sought to find better profits through increased lending in the commercial real estate sector.

By the middle of the decade, however, Southwest real estate values had plunged, related loans were uncollectible, and banks throughout the region were beginning to fail. Weak commodity and land prices were contributing to the collapse of hundreds of small banks in agricultural communities throughout the Midwest and compounding pressures on the federal deposit insurance fund. …