The Federal Deposit Insurance Corp. made another effort to increase market discipline over the nation's banks by proposing yesterday to issue weekly press releases detailing enforcement actions taken against them.
By publicizing the enforcement measures, the federal insurer hopes to encourage depositors to keep their funds in well-managed banks rather than in marginal banks paying the highest interest rates. The move, which represents a radical departure from past policy, is expected to generate considerable controversy during a 30-day comment period.
A spokesman for the American Bankers Association said the trade group was "sharply at odds [with the FDIC]. The information could be misinterpreted by depositors," who might withdraw their funds. "The reaction is uniformly negative when discussed by bankers," he added.
FDIC Chairman William Isaac admitted that disclosure of troubles after the fact might increase instability by creating a run on a bank. Nevertheless, he said the threat of disclosure would prompt banks to face up to their problems at an earlier stage and, therefore, would contribute to stability over time.
Publicity also would slow the growth of troubled banks, Isaac said. Too often, there is a tendency for these institutions to try to "grow out" of their problems by accepting large amounts of brokered funds at high rates, he said.
Comptroller of the Currency C. Todd Conover, who also is a member of the FDIC, expressed reservations about having the FDIC disclose problems and suggested that banks be required to make the information public themselves. Currently, banks are required only to inform shareholders in their annual reports.
The enforcement actions that the FDIC plans to disclose to the public include its intention to terminate a bank's insurance, suspend or remove officers or directors, get a cease-and-desist order if the bank's behavior is likely to cause insolvency or weakness, levy fines, or order the bank's capital raised within a specified time. The FDIC formerly disclosed such actions only to the banks.
The FDIC also will report on violations of consumer protection and civil rights laws. "Institutions whose problems have resulted from poor management will be less able to hide that fact," the FDIC said.
Publicity -- like risk-based insurance -- is seen as a potentially effective method of curbing bank failures in a deregulated environment. By disclosing both the charges made against a bank as well as the final order or outcome, the FDIC expects to reduce the number of attempts to fight or delay its actions. Last year, 215 enforcement actions were taken against the 8,850 banks the FDIC regulates.
Isaac declined to estimate how many bank failures would be prevented by publicizing enforcement actions. For example, he said, publicity would not have affected the collapse of Penn Square National Bank in Oklahoma City and Continental Illinois National Bank in Chicago because no formal enforcement action had been taken against them prior to failure.
In other action, the board gave final approval to new capital requirements. For the first time, all sound banks, regardless of size, will be required to have a 6 percent minimum ratio of capital-to-assets, of which 5.5 percent must be in primary equity capital. Previously, big banks had a lower capital ratio of 5 percent. The Federal Reserve and the Comptroller of the Currency are expected to follow suit for the banks they regulate.