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A Year After Big Bank Failure, Stability Returns

January 1, 1992

BOSTON (AP) _ It was just a few days into 1991, and Paul Funari was starting to worry about the $4,000 he saved.

In neighboring Rhode Island, depositors were locked out of their credit unions. Here at home, Funari got word that his own bank - Bank of New England - was sinking toward insolvency.

His move to withdraw his money became part of a billion dollar run that toppled the bank within days.

But several months later, the bank was operating under a new name and Funari was back with his money. These days jitters have been replaced by confidence. ″Things just seem more stable,″ Funari said.

That assessment is shared by many observers a year after regulators seized Bank of New England in one of the costliest bank failures in history.

While the industry still struggles to recover from crippling losses and smaller banks continue to disappear, experts say the region’s banking sector is steadying.

And an important first step in that process was removing a sick Bank of New England from the landscape, cleaning out its bad assets and placing the healthy remains within a growing regional powerhouse, Fleet-Norstar Financial Group Inc.

″Steering that ship back to safe harbor has had a settling effect on the banking environment,″ said Lawrence Fish, who chaired the bank before its collapse. ″But it’s too soon to say that everything’s fine.″

Indeed, recent figures from the Federal Deposit Insurance Corp. show banks in the Northeast had the highest rate of loans past due and the highest percentage of loan losses as of Sept. 30.

But in the third quarter of 1991, commercial banks reported growing profits, and most New England states showed a drop in the percentage of troubled real estate loans.

″Our decline has stopped, but we’re still at the bottom of the pile,″ said Warren Heller, research director for Veribanc Inc., a bank rating firm.

New England banks had been troubled since 1989, when the sinking economy started exposing shoddy real estate loans that were made during the booming 1980s. As these real estate projects went bust, banks lost millions of dollars.

Against this backdrop, 45 banks and credit unions were closed on New Year’s Day 1991 because their private insurer failed. Many of those credit unions reopened within a week, but some remain closed today.

In Massachusetts, three days after the Rhode Island crisis erupted, Bank of New England announced it would suffer another in a series of staggering losses. The bank, once the second largest in New England, had been struggling for months, and the latest round of bleak news triggered a run that prompted the FDIC to seize the bank on Jan. 6.

During those dark moments, officials couldn’t be sure where events might lead.

″There was a great fear among us that it would spread,″ said Michael Hanson, the Massachusetts banking commissioner. ″Bank runs are an emotional thing.″

Instead, observers say the FDIC helped restore faith in the system by guaranteeing all Bank of New England deposits and then awarding the bank to Providence, R.I.-based Fleet a few months later.

The task of rebuilding the banking sector, however, will take much longer. A lot depends on the regional economy, which has shown few signs of life.

Until the economy improves, more banks will fail, and survivors will seek to boost profits by cutting costs, experts say. That means 1992 should see more consolidation, such as the merger under way between Bank of Boston Corp. and Shawmut National Corp.

Regulators, meanwhile, will rely on some of the lessons they have learned as they confront emerging banking problems in California.

Some analysts say because regulators were burned by bank failures in Texas in the mid-1980s, they brought a new sense of toughness to New England. But politicians criticize regulators for not spotting Bank of New England’s poor lending practices earlier.

″We should have seen the problems coming quicker,″ said Paul Fritts, executive director of supervision and resolutions for the FDIC.

″We’ll wait until after this is over, after they’ve gotten their hands burned and have their hands wrapped and start getting fat again, then we’ll see if they’ve learned,″ he said.

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