The chairman of the Federal Deposit Insurance Corp. said yesterday that the worst is behind the banking industry and that there should be fewer bank failures in 1985 than in 1984.
So far this year, 76 banks have failed -- including the University Bank of Wichita with $4.7 million in deposits yesterday. Experts expect several more to succumb before the New Year. That number surpassed 75 that failed in 1937, but is far below the 4,000 failures recorded in 1933, before the FDIC was created.
William M. Isaac said, however, that a renewed rise in interest rates, a turndown in the economy or a worsening in agricultural problems could change his prediction that fewer banks will fail next year.
At a lengthy luncheon briefing with reporters, Isaac said that although the banking system as a whole is getting better, the number of banks on the agency's problem list is growing because of problems in the agricultural sector. About 800 of the nation's 14,700 banks are now classified as problems, and the list is growing because agricultural banks are being added at a faster pace than non-agricultural banks are being taken off.
Isaac said that the growing difficulties among farm banks do not pose a "threat" to the banking system as a whole. Most problem farm banks are relatively small.
Isaac, who said he is likely to leave the regulatory agency before the end of 1985, also predicted that the agency would find some way to control the growth of so-called brokered deposits, which he said present not only a threat to the stability of the banking system, but also a threat to the health of the $17 billion trust fund the FDIC maintains to insure deposits up to $100,000 in most banks.
He said that $9.5 billion of the $22 billion of these brokered deposits -- all of which are in amounts less than $100,000 to take advantage of full FDIC insurance -- are in "troubled banks." Troubled banks are those that either are having serious problems or that the regulatory agencies think are on a course that could lead to serious problems.
The FDIC and the Federal Home Loan Bank Board -- which insures deposits in savings and loan associations -- last spring took steps to limit the amount of federal insurance that is available on brokered deposits. However, a federal court enjoined the rule before it took effect Oct. 1. The FDIC has appealed the ruling.
Isaac vowed that whatever the outcome of the agency's appeal, "We're going to win that battle somehow. We're not going to continue to allow brokers to dump billions of dollars into troubled banks."
Because of FDIC and bank board insurance, there is no risk to a depositor if a bank in which the funds are placed should fail, Isaac said. As a result, brokers merely search for the institutions that pay the highest rate of interest and can ignore other considerations such as the bank's soundness. In some situations, brokers will break down a larger deposit, such as a $1 million deposit, into 10 $100,000 deposits and place them at separate institutions.
Isaac said that troubled banks, as well as those that want to grow quickly without regard to the risks, frequently use money brokers to attract deposits they otherwise could not get. As a result, some institutions get into trouble that would not have if they had been unable to obtain insured brokered deposits. In other situations, small troubled banks grow into bigger troubled banks before they fail.
Many money brokers, such as the big securities firm Merrill Lynch & Co., argue that they do their own credit analysis of banks before placing the $100,000-sized certificates of deposit in a financial institution. Merrill also operates in the giant brokered funds business as well, an industry in which the average deposit is about $5 million.
Isaac disputed Merrill Lynch's claim that it does good analysis of the banks it deals with. He said that Merrill Lynch has placed $2.5 billion of small brokered deposits in troubled banks.
Roger Vasey, chairman of Merrill Lynch Money Markets Inc., said that the data the FDIC has is wrong and appears to mix both the insured and the uninsured brokered deposits -- in part, he said, because the new reporting forms required of banks are confusing. Vasey said that Merrill Lynch has placed less than $2 billion of insured brokered deposits in all the banks it deals with, far less than the $2.5 billion Isaac claims the company has placed in troubled banks.
Isaac said about 600 banks use insured brokered deposits. A spokesman said later that about 200 of those banks are troubled.
Isaac also predicted that legislation next year would close loopholes that permit banks to set up "nonbank banks" in states outside their headquarters state.