Federal Home Loan Bank Board Chairman Edwin J. Gray yesterday called for urgent federal legislation to rescue the Federal Savings and Loan Insurance Corp. by creating a risk-based premium system.
He also proposed a novel concept whereby "well-managed FSLIC-insured institutions and other entities could contract with the Federal Savings and Loan Insurance Corp. to manage our severely troubled institutions in order to try to at least stabilize them or even turn them around." He did not elaborate.
In a forceful, candid speech to the U.S. League of Savings Institutions, the largest trade organization for thrifts, Gray noted that the savings and loan industry as a whole has no tangible net worth, that the FSLIC's ratio of funds to insured deposits is below 0.76 percent and that FSLIC payouts to deal with institutions plagued by bad assets will be four to five times higher than the cost of dealing with the S&L interest rate crisis of several years ago.
Even the costly special assessment that the bank board could levy on thrifts would be insufficient to generate enough funds, he said.
Gray rejected any notion of passing the burden on to taxpayers by exercising the guarantee of the full faith and credit of the United States that stands behind deposit insurance. That, he said, would lead to the end of the Federal Home Loan Bank system.
He also dismissed suggestions that FSLIC borrow from that banking system, which is capitalized at the relatively high rate of 10 percent.
He questioned whether any loans made to FSLIC by Federal Home Loan Banks would ever be repaid. Undermining that system would send the wrong signals to the money markets at home and abroad, he added.
Gray said he will propose to Congress a revised insurance plan whereby any state-chartered thrifts that are federally insured and that engage in risky lending activities prohibited by law to their federally chartered counterparts will be required to pay a higher insurance premium. The higher a thrift's net worth, the smaller the additional assessment.
Such a risk-based premium also has been endorsed by the Federal Deposit Insurance Corp., which backs deposits at banks.
Gray said the FHLBB would follow another FDIC lead and transfer its entire field examination force out of Washington to the Federal Home Loan Banks around the country in an effort to better coordinate examination and supervision processes.