Bankers Wince At Visions of the 1930s
NEW YORK (AP) _ At first glance, history appears to be repeating itself in the banking industry. Reports of bank failures, a weakened deposit insurance system, bank holidays, and images of angry depositors outside closed institutions conjure up the industry’s worst days in the 1930s.
The Rhode Island credit union crisis and the federal seizure the failed Bank of New England on Sunday are the most recent illustrations of the troubles in the industry, where 734 banks with $102 billion in total assets have perished since mid-1987.
But bankers cringe at Depression-era comparisons. They say the latest troubles are due to tough competition from foreign banks, rising defaults in commercial real estate loans, heavy government regulation, and infringement on traditional lines of business such as credit cards from non-banking companies.
In interviews Monday, analysts acknowledged the deep economic problems in the Northeast but said the Rhode Island and Bank of New England crises - for now, at least - are aberrations.
″The failure of the Bank of New England didn’t come as any surprise. The (Federal Deposit Insurance Corp.) has reserves for the type of assistance that it’s providing,″ said Mark Burneko, spokesman for American Bankers Association in Washington.
Consumers can take comfort if their accounts have FDIC-insurance, he said. The corporation guarantees deposits up to $100,000. In Bank of New England’s case, the FDIC agreed to protect all deposits regardless of the amount because of the bank’s strong ties to the region’s economy. That decision is expected to add $300 million to the government’s bailout.
″No one’s lost a dollar in every federally insured deposit and there’s no reason that they would be at risk,″ said Fritz Elmendorf, spokesman for the Consumer Bankers Association in Arlington, Va.
But a series of bank failures has drained the fund to $9 billion by the end of 1990. The Bush Administration and the industry are advancing proposals to inject fresh funds into the bank fund without taxpayer assistance.
The government’s takeover of the Bank of New England, the nation’s 33rd largest, could wind up costing $2.3 billion, the FDIC estimated. Rhode Island’s 45 credit unions and banks were closed temporarily Jan. 1 when a private deposit insurance fund became insolvent. On Monday, 22 credit unions reopened with new federal deposit insurance.
Burneko and others also said the banking industry remains profitable at the present time, though overall earnings are down from previous years.
In the first three quarters of 1990, U.S. commercial banks reported $15.41 billion in net income. The FDIC reported 89 percent of the nation’s 12,399 banks earned money in the third quarter ending in September.
A few healthy banks are flaunting their solvency and safety as the fortunes of others decline. The Merchants Bank of New York, for example, is advertising that its portfolio lacks junk bonds, Third World loans, or large numbers of commercial real estate loans. The Bank of New England’s aggressive commercial real estate lending in New England tight economy is widely believed to be its downfall.
″We’re very proud of our status as a safe bank,″ said James Lawrence, president and chief executive officer of Merchants Bank. The bank has seen some interest from out-of-state depositors.
Despite Merchants’ boasting, Lawrence said, ″It’s not over in the New England area. They are having some hard times, but I don’t think everyone is running for new banks at this time.″
Bank of Boston spokeswoman Connie Hubbell said the bank has received numerous inquries from interested depositors following the latest bank failures.
That bank, a neighbor of the Bank of New England, is in what Hubbell called solid financial shape. She said it’s in the middle of a heavy television advertising campaign ″because we felt the marketplace needed some sort of leadership.″