Former comptroller of the currency C. T. Conover believes that the chief challenge facing his successor will be supervising a U.S. banking system that is weaker than when he took office in December 1981.
Conover, who resigned yesterday as comptroller -- the chief regulator of the country's 4,700 federally chartered banks -- said in a recent interview that the system has not "weakened to the point where anyone should be concerned," but that regulators will have to continue to take steps to "maintain the public's confidence."
Regulators do not have to be reminded that confidence is the essence of banking. It was erosion of confidence in Continental Illinois National Bank -- one of the nation's largest -- that provided the greatest threat to the U.S. banking industry in half a century.
A run on Continental's deposits a year ago forced the government to launch a $4.5 billion operation to keep the giant Chicago bank from collapsing -- and perhaps causing a massive crisis in the world financial system.
Conover said his successor -- who has not been named -- will have to take further steps to boost bank capital, the last line of defense against a bank's losses, and to make sure that there are adequate internal constraints on bank behavior as well as increased disclosure by banks to make it easier for the "market" to keep banks on the straight and narrow.
Even though the banking system is weaker than it was three years ago, it is getting stronger, Conover said. The major exception is the farm economy, which will continue to worsen throughout 1985. Because a bank's loan portfolio is a reflection of the economy, banks that concentrate their lending on farmers will continue to suffer.
"I wish I could give you five good" illustrations that banks are getting stronger, the former comptroller said. "My instincts tell me that the banking system is getting better and will continue to get better."
Conover said the improved economy will generate the most support for the banking industry in the future -- even though two years of economic recovery have not resulted in the level of improvement in the quality of bank loan portfolios that one would have expected.
In addition, Conover said a large number of banks are reporting stronger earnings -- although poorly managed banks are continuing to have difficulties. "The dichotomy" between well-run banks and poorly run institutions is increasing, he said.
Conover and Federal Deposit Insurance Corp. Chairman William M. Isaac have been staunch advocates of increasing the types of business ventures banks can engage in, arguing that banks need to diversify to shield themselves from the ups and downs of the business cycle.
Conover said his successor will have to help devise comprehensive banking legislation that will deal not only with giving banks new powers and services -- such as entering the securities, insurance and real estate brokerage businesses -- but with "geographic" deregulation as well.
Interstate banking appears to be inevitable: A number of states already have taken steps to permit out-of-state institutions to open their doors.
But nearly all forms of deregulation generate opposition, and Conover is not a very popular figure among a large number of small bankers, who feel threatened by deregulation, as well as among a number of legislators who claim that Conover has sidestepped congressional will by permitting the establishment of so-called nonbank banks.
Conover, who was a California management consultant, said he has not decided what he will do in the future, although he plans to return to California for at least the summer. H. Joe Selby, the senior deputy controller for bank supervision, will be acting comptroller until a successor is named.
The comptroller's office supervises about one-third of the 15,000 banks in the United States. The rest of the banks are overseen by the Federal Deposit Insurance Corp. or the Federal Reserve Board. Conover said regulators will have to decide whether to recommend to Congress that the bank regulatory apparatus be consolidated into one agency. He said the deposit insurance system probably will have to be overhauled as well.
Conover believes that retaining quality personnel probably is the most vexing problem that regulators face. Banks hire their own internal auditors to do the same things that federal bank examiners do -- judging the quality of loan portfolios and the internal controls at an institution as well as ensuring that safe and sound practices are followed.
Conover said a major problem "is compensation." Banks pay better than the government. He said there is a 15 percent annual turnover among bank examiners and, as a result, "the level of expertise is not as high as it ought to be."
But he said that the quality of examinations is improving as examiners are increasingly making use of microcomputers to analyze the banks they study.
Most banks are getting healthier, but a large number are not. More than 900 of the nation's banks are on the sick list, and because of growing problems among farm lenders, the list is getting bigger.
Even though the banking system is getting healthier, it remains vulnerable to a sharp increase in interest rates and a sudden deterioration in oil prices, Conover said.
"If interest rates go up, there will be more problem loans" as customers have troubles paying the higher interest rates on their debts. "It's a simple fact. We've got to keep our inflation and interest rates under control or our depository institutions" will suffer.
"Oil prices have been weakening for some time. As long as they decline at a manageable pace, everybody is better off," the former comptroller said. But if prices fall "zappo, tomorrow afternoon, we've got problems."
The oil industry is a huge user of bank credit. There are a lot of shaky oil loans at many banks that would become bad loans if oil prices sagged again.
It was the decline in oil prices in Southwest Oklahoma that triggered the failure of Continental Illinois. Confidence in the giant Chicago bank eroded steadily, and a year ago big depositors launched the biggest run in banking history. The government stepped in with a $4.5 billion rescue package.
"We can't keep all banks from failing," Conover said. But he defended the government's decision to save Continental -- while severely punishing shareholders, top management and directors. The cataclysm that might have resulted from the failure of a key multinational bank was too frightening to chance, he said. Small banks can fail without threatening the system. Giant ones cannot.
He said the goal of bank regulators is to devise a system that would treat failing large and small banks in the same way. But he said regulators do not yet have a way to do that