Recent disclosures by some state-chartered savings and loan associations in Maryland that they have applied for federal deposit insurance really shouldn't have come as a surprise to anyone who has followed the ups and downs of the thrift industry during the past five years.
Reverberations from Ohio's S&L crisis continue to be felt in states where private deposit insurance programs exist, but the shift to federal deposit insurance was almost a foregone conclusion before the debacle in Ohio last month. The Ohio crisis merely exposed the Achilles heel of the private insurance programs and, in all probability, accelerated the planning by some state-chartered S&Ls to make the switch.
In truth, the underpinnings of the private insurance programs began to weaken four years ago with a gradual but revolutionary transition from restricted competition to deregulation of the thrift industry. First, the gradual elimination of all interest rate ceilings starting in 1981, and then passage of the Garn-St Germain Depository Institutions Act of 1982 freed federally insured thrifts to compete more favorably with other segments of the financial services industry.
Thus, it wasn't the fallout from Ohio that caused many state-chartered S&L officials to consider withdrawing from private insurance programs in favor of federal insurance. It was deregulation. The seed was planted long before anybody ever heard of the Ohio Deposit Guarantee Fund.
Indeed, Chevy Chase/ Government Services Savings and Loan, Maryland's largest privately insured S&L, filed an application with the Federal Savings and Loan Insurance Corp. in August. Although accounts of Chevy Chase's action in that regard have been made public only recently, the decision was, as one executive indicated, part of a long-range strategy.
Coming in the wake of the Ohio thrift crisis, disclosures of plans by at least five Maryland state-chartered S&Ls to seek federal insurance would seem to indicate a lack of faith in the private insurance fund. What we're seeing, however, is the gradual realization by some state-chartered institutions that for them, the fund offers no real advantage.
Indeed, those who contemplate a switch from the Maryland Savings Share Insurance Corp. (MSSIC) to the FSLIC have said that the Ohio crisis was not the major influence in their decision. What is happening, they implied, is that the effects of deregulation have caught up with MSSIC, the Ohio Deposit Guarantee Fund, the Massachusetts Cooperative Central Bank and other private insurance funds.
It's not that those funds are poorly managed. That case hasn't been made. The MSSIC program, for example, receives high marks from industry and state officials. What's more, there is a strong argument in favor of continuing a MSSIC form of insurance program for small, community-oriented, state-chartered S&Ls that probably would not qualify for federal insurance.
But for the larger, more competitive S&Ls, private insurance programs have become anachronisms. State-chartered S&Ls traditionally have operated under more liberal regulations than their federally chartered counterparts. Not only have state chartered S&Ls been permitted to make loans and invest in areas previously off limits to their federal counterparts, but, unfettered by interest rate ceilings, privately insured thrifts also were able to pay higher rates on passbook savings accounts.
That is changing. The Garn-St Germain Act significantly expanded the powers of federally insured S&Ls to make real estate, consumer, commercial and construction loans. Moreover, the final phase in a sweeping deregulation of interest rate ceilings goes into effect March 31, 1986. All interest rate ceilings and all minimum deposit requirements will be eliminated then. Federally insured S&Ls, for example, will be able to pay whatever they choose on passbook accounts, instead of the current maximum of 5 1/2 percent. In other words, the so-called differential enjoyed by state-chartered S&Ls will become ancient history less than a year from now.
With the full faith and credit of the United States behind federally insured thrifts in a more liberal operating environment, it is no wonder that some state-chartered S&Ls are rethinking their status. Clearly, if state-regulated S&Ls had an advantage, it is rapidly fading. And even though states have been in favor of more liberal regulations for S&Ls, they haven't been inclined to put their money where their mouths are by approving state-backed deposit insurance programs.
Under normal circumstances, and with a smaller pool of deposits to insure, state funds can be viable. The other side of the coin raises questions about their ability to cover deposits held by several large institutions, however.
As the chairman of the New York Stock Exchange noted recently, the crisis in Ohio shows that "state banking systems cannot take a massive hit." There has to be an "enormous pool of liquidity" to handle problems such as the one encountered by Ohio officials, the NYSE's John J. Phelan Jr. noted in a recent interview.