The chairman of the Federal Deposit Insurance Corp. said yesterday that regulators are discussing a series of proposals designed to place more public discipline on bank behavior, including making public any enforcement action taken against a bank and forcing big depositors to share in the risk of all bank failures.
William Isaac said in an interview that as the banking environment becomes less controlled and more risky banks will have "greater freedom to make mistakes." He said the best way to insure that banks do not take too many risks is to increase public disclosure and to increase the stake that depositors have in the success or failure of a bank.
Beginning June 30, 1983, regulators will disclose problem loans of individual banks, the portions of loans they have sold to other banks (called participations) and banks' sensitivity to changes in interest rates.
The new disclosure policy, which has been fought by bankers and some regulators, "is an important first step, but not the only one we intend to take," Isaac said.
He said regulators also are considering proposing to Congress that big depositors -- those whose deposits exceed the federally insured limit -- share in the risk of a bank failure, even when the bank is merged into another bank.
Normally during a merger, the healthy acquiring bank assumes all deposits, both those that are insured and those that are not. If a big depositor stands to lose money even during a bank merger, he said, those depositors are more likely to make sure the bank is sound and well run before putting in their money.
Furthermore, he said, he thinks that enforcement actions taken by bank regulators -- either the FDIC, the Comptroller of the Currency or the Federal Reserve -- should be made public.
"We have enforcement actions outstanding against almost every problem bank," he said. There are 320 banks in the country on the problem list, which includes banks having severe difficulties as well as those close to failure. The enforcement actions include such steps as ordering a bank to raise more capital, change its lending practices or its management.
Enforcement actions, which Isaac said are usually effective, are now kept secret.
In the past, he said, regulators felt the best way to deal with problem banks was "quietly." But in those days, he said, there "weren't too many ways a bank could get into trouble. If a bank failed, there was usually fraud involved."
If there is more disclosure about banks and their conditions, he said, the institutions will have an incentive not to engage in bad practices and to change those practices more quickly if they do. Finally, Isaac said, banks would fail more quickly and cause fewer problems.
For example, he said, with the type of disclosure he proposes, Penn Square National Bank probably would have failed a year earlier. It would have had $200 million fewer deposits and would have sold $1 billion fewer loans to other banks, many of whom have faced serious problems because of the problem loans they blithely purchased from the now-defunct Oklahoma City bank.
Big depositors stand to lose money in the Penn Square failure because the FDIC was unable to find a merger partner and had to pay off insured deposits. Depositors with more than $100,000 in Penn Square, however, stand to lose some portion of those deposits. Most of the losers were supposedly sophisticated investors such as savings and loans associations and credit unions.
If Penn Square had been merged, these depositors would not have lost any money. But under Isaac's proposal--which would need congressional approval -- those large depositors would have lost some money even if Penn Square had been merged.
He said that most large depositors believed regulators would never allow a $500 million bank to fail and were willing to take advantage of the premium interest rates being offered by the bank without regard to any risks. If depositors knew they were taking a risk by making a deposit in a bank, Isaac said, they would be more careful where they placed the funds.