Bank failures have risen because of the recession, and the number of problem banks is rising, the chairman of the Federal Deposit Insurance Corp. said today.
William M. Isaac said at the annual meeting of the D.C. Bankers Association here that 11 commercial banks have failed so far this year. The worst rash of bank failures since World War II was 16 in 1974.
Isaac stopped just short of predicting a record number of failures in 1982, but noted that "we are seeing an increase" in the number of institutions being placed on the "problem bank list" at his agency.
Nonetheless, Isaac said that the FDIC's insurance fund, which guarantees deposits up to $100,000, is more than adequate to handle any increases in failures. Despite a $1.7 billion chargeoff to the insurance fund to take care of potential problems at mutual savings banks (similar to savings and loan associations but insured by the FDIC), Isaac said the insurance fund is $12.5 billion, which is $1.3 billion bigger than at the beginning of last year.
He told the bankers gathered at the posh Homestead resort that the "combination of recession and high interest rates is beginning to catch up with commercial banks." When interest rates began to skyrocket three years ago, S&L and mutual savings banks were hit hard immediately because the income from their loan portfolio (mainly home mortgages) did not increase as fast as the cost of their deposits, Isaac said. But banks were "more successful in passing along" higher interest costs to their mostly-short-term borrowers.
Now three years of high rates and two recessions are "beginning to tell on customers" and, as a result, more companies and individuals are finding it difficult to repay or stay current on their loans, he continued.
Isaac said that bank regulators need new tools to help them deal with bank problems, including the authority to seek out-of-state bids for failing banks that are bigger than $500 million.
He noted, however, that the upcoming November elections will make it hard for Congress to pass any laws that are "controversial."
He said it is unlikely that federal regulators will give bankers and savings and loan associations authority to set up accounts that would compete with money market mutual funds until savings and loans are given authority to do more and different types of lending.