Another S&L crisis looms: Congress has a plan to shore up an underfunded insurance pool, but banks are lobbying against it

0 Comments | Insight on the News, June 17, 1996 | by Gene Koprowski

Congress has a plan to shore up an underfunded insurance pool, but banks are lobbying against it.

A new savings-and-loan crisis is festering, just a few years after most Americans began to forget the 1980s debacle that cost them $125 billion. The insurance fund that serves as a safety net for the nation's S&L's is perilously close to insolvency. And a combination of election-year policy decisions on Capitol Hill, lobbying by the banking industry and the tussling over the budget deal has exacerbated the situation.

According to Brian Smith, director of policy and research at the Washington-based America's Community Bankers trade association, the Savings Association Insurance Fund created by Congress during the late 1980s was financed with $8.2 billion in bonds. "Interest on the bonds is paid from premiums on thrift deposits"' Smith tells Insight. "A fee of 23 cents per $100 in deposits is assessed, But thrift deposits are shrinking rapidly." Presently, banks hold about 33 percent of the money insured by the fund; more than 800 commercial banks nationwide have purchased S&Ls since 1989. Such banks transfer the accounts from the thrifts to their branches. "By doing that, they no longer have to pay into the fund," says Smith. "As a result, the bonds could go into default as early as next year."

That would cause a financial headache for the United States -- at a time when questions about the health of the economy are increasing. President Clinton and senior legislators such as House Majority Leader Dick Armey of Texas have tried to broker a deal, but problems persist.

"Passage of [Savings Association Insurance Fund] legislation is of the highest priority for the nation," wrote John D. Hawke Jr., undersecretary of the Treasury for domestic finance, in a May 13 letter to Congress, a copy of which was obtained by Insight. Such legislation, noted Hawke, has been supported strongly by Clinton, Federal Reserve Chairman Alan Greenspan and FDIC Chairman Ricki Tigert Helfer.

The most recent proposal floated by the administration and Congress would order thrifts and banks to pay a $5.5 billion special assessment to fully capitalize the fund, sharing the weight of the bond-interest burden and avoiding a default. In the congressional version of the plan, the additional annual cost would be small, less than 1 percent of after-tax profits for banks, for example, or about $40,000 per bank. Last year, the U.S. banking industry made $50 billion in profits, or about $5 million per bank.

"The special assessment would bring the savings-association fund up to its required reserve ratio," says Smith. "That would enable the fund to pay the $793 million per year in interest on the bonds. What's more, the proposed recapitalization could resolve the last vestiges of the thrift crisis right now, without the need for taxpayer funds."

The thrift industry has backed the plan, even though (unlike for the banks) the cost to them would be high -- equal to an entire year's profits for the industry "However, the thrift industry's [willingness] to pay such a high price may erode if action on this proposal is delayed and some institutions are successful at shifting their deposits," writes Hawke.

The banking industry, on the other hand, opposes the plan, refusing to bear any costs of assuring the health of the federal savings insurance system -- "even though banks have been a major beneficiary of actions taken by Congress in standing behind the insurance fund," notes Hawke.

A few weeks ago, House Republican leaders and the administration actually reached a rare consensus and were prepared to sign off on a deal for the thrift fund. "This necessary proposal will protect taxpayers to assure that no insured depositor suffered any loss as the result of these problems," wrote Clinton in an April 24 letter to Armey obtained by Insight. "I believe this legislation has true bipartisan support and I urge the leadership to consider immediate congressional action'

But commercial banks balked at the $12 billion they would have had to pay over the next two decades. The American Bankers Association, or ABA, lobbied the House Rules Committee, whose members are targeted by banking political action committees, and managed to have the legislation stricken from the budget bill -- which subsequently passed. According to a spokesman for the Washington-based ABA, the association does not believe the insurance fund will go bankrupt as quickly as Hawke and others fear. He also believes that secondary mortgage guarantors such as Freddie Mac and Fannie Mae should contribute to the thrift fund.

Some commercial bankers are breaking ranks with their trade association on this issue. According to a March 26 letter to Senate Majority Leader Bob Dole signed by an array of banks, including Crestar Financial Corp. of Virginia and the First National Bank of Maryland, crises in the nation's banking system can be quite "disruptive" for consumers, employees and investors.

"We are concerned that a reinvigorated thrift industry could again be forced into a crisis -- a crisis caused not by bad management or risky activities, but by factors far beyond the control of thrifts," the letter said. "We feel it is incumbent upon Congress to act quickly on a comprehensive solution to ensure the continuing stability not only of the thrift industry, but of the banking industry as well."