Newspaper article THE JOURNAL RECORD

Most Large Banks Are near Insolvency, Says Federal Report

Newspaper article THE JOURNAL RECORD

Most Large Banks Are near Insolvency, Says Federal Report

Article excerpt

WASHINGTON (AP) - Most of the nation's largest banks are teetering on the brink of insolvency and tax money must quickly be injected into the government fund insuring deposits, warns a congressional report due out Monday.

Bank failure costs could total $63 billion in a severe recession, it said. Even the mild downturn expected by most economists would leave the fund short of cash, said the report, which was written by three economists at the request of a congressional subcommittee.

``This nation faces an almost unprecedented situation in having most of its largest banks operating on - or conceivably, over - the edge of insolvency,'' said the report, prepared for the House Banking subcommittee on financial institutions.

The study was written by Robert Litan of the Brookings Institution, a Washington-based think tank; James Barth of Auburn University; and R. Dan Brumbaugh of Stanford University. Barth and Brumbaugh are former chief economists of the Federal Home Loan Bank Board, the regulatory agency - since dismantled - of the savings and loan industry.

The report is due to be released at a public hearing Monday, but The Associated Press obtained the economists' summary on Friday.

The report directly challenges Treasury Secretary Nicholas F. Brady, who has declared banks and savings institutions ``as different as chalk and cheese.'' Brady has pledged that bankers, not taxpayers, will pay to bail out banks if necessary.

Federal Deposit Insurance Corp. Chairman L. William Seidman has said the fund has enough money to handle the failures foreseen by the agency into mid-1991. He has recommended the adoption of a backup plan to inject more money into the fund, if needed.

Barth and Litan favor shoring up the FDIC with a massive loan from the Treasury, as large as $50 billion. They recommend that banks repay the sum over an extended period, perhaps 10 years, ``unless events unfold that make repayment impossible.''

The report said, however, that Brumbaugh favors an unambiguous taxpayer bailout because he ``believes that higher (deposit insurance) premiums now would send additional weak banks into insolvency and could irreparably harm the rest of the industry.''

The economists evaluated the health of the insurance fund under a range of recession scenarios, from mild to severe. Mild is defined as a national downturn roughly half as bad as the recession now plaguing New England. Severe is defined as the national equivalent of the contraction that rocked Texas in the mid-1980s when oil prices plummeted. …

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