The chairman of the Federal Deposit Insurance Corp. predicted today that more than 75 banks will have failed by the end of the year and a similar number will fail in 1985.
William M. Isaac said the large number of bank failures was the "product of the last recession." He said that, even though the economy is now more than two years into recovery, the failure rate remains much higher than normal because segments of the economy still are depressed and banks lending to those industries are recovering more slowly.
At a press conference following an address to the annual meeting of the American Bankers Association, Isaac named agriculture, energy and parts of the real estate industry as major economic problem areas and noted that unemployment remains high in a number of states.
Because of the continuing problems in some industries, the number of banks on the special problem list maintained by regulators has risen from about 750 several months ago to nearly 800 today. That is more than twice the number of banks on the problem list in the worst period following the recession of 1975-76. There are about 14,700 banks in the United States.
But Isaac said that regulators also can detect the good effects of the economic recovery in a number of regions and industries and that the "worst is largely behind us."
He said the recent cuts in oil prices will hurt banks that have loans concentrated in the oil energy sector, but said that lower oil prices will help much of the economy -- including farmers, who have been struggling with high interest rates, a large debt load and low crop prices for four years.
Isaac also criticized Congress for failing to produce legislation that would give the regulators enhanced powers to introduce discipline into banking -- either by charging deposit insurance premiums that are related to the amount of risk in a bank's loan portfolio or by requiring banks to boost sharply their capital levels.
The bank regulator -- whose agency insures deposits up to a maximum of $100,000 and examines about 9,000 state-chartered banks that are not members of the Federal Reserve system -- said he prefers requiring banks to boost their capital sharply. The biggest banks soon will be required to have capital equal to 6 percent of their assets.
Isaac would like to raise the minimum capital level to 9 percent and require those banks to issue subordinated debt -- debt that gets repaid last in the event of a failure -- to add to their capital. Well-run banks should be able to raise that debt at a cost equivalent to what they are paying for big certificates of deposit, Isaac said. Banks that are not as well run would pay a premium to raise the capital, while poorly run banks would have trouble selling any new debt at all, he said. That would prevent the banks from growing and posing a greater threat to the system.
He said he would like guidance from Congress on what the legislators want regulators to do in trying to change the system's approach to dealing with problem banks. He said he also would like legislation that would make it easier to handle massive bank failures -- such as the de facto failure of Continental Illinois National Bank last summer -- without guaranteeing that all depositors will be made whole.
Regulators feared that, if they permitted Continental to fail, the repercussions in both the domestic and international financial systems could have been disastrous. "We did what we had to do. But it doesn't mean we had to like it," Isaac said.
He noted that legislators have criticized regulators for bailing out big banks while permitting small ones to fail. But he said that Congress has taken a number of steps over regulators' objections in recent years that remove some of the discipline from the banking system.He cited an increase in the level of insured deposits to $100,000, granting the FDIC's insurance fund the full faith and backing of the U.S. Treasury and creating a special program for savings and loan associations that permits the government to pump funds into S&Ls that otherwise would fail because their capital had dwindled. cited an increase in the level of insured deposits to $100,000, granting the FDIC's insurance fund the full faith and backing of the U.S. Treasury and creating a special program for savings and loan associations that permits the government to pump funds into S&Ls that otherwise would fail because their capital had dwindled.