The number of problem banks stands at an all-time high of 949, and bank failures this year will almost certainly exceed last year's post-Depression record of 79, Federal Deposit Insurance Corp. Chairman William M. Isaac told legislators yesterday.
At the same hearing, Federal Reserve Chairman Paul A. Volcker characterized the current regulatory status of the financial services industry as "a mess." He called for quick congressional action, which, he said, could only strengthen, not undermine, the safety and soundness of the banking system.
The regulators testified at the Senate Banking Committee's opening session on banking legislation. Although the bill has not yet been completed, committee Chairman Jake Garn (R-Utah) promised he would again adopt a comprehensive approach rather than just close legal loopholes, as the House seems to favor. The Senate last year passed an omnibus bill giving banks new powers, such as dealing in mortgage revenue bonds, and endorsing regional banking arrangements. However, banking legislation died when the House failed to act.
Since then, the large number of bank and thrift failures has raised questions about the effect of deregulation on the safety and soundness of the banking system and the wisdom of further deregulation. On the other hand, without congressional action, Volcker pointed out, the regulators are faced with the difficult task of making decisions based on laws that are 50 years old in some cases.
Volcker said he feared state actions could lead to regional compacts allowing "parochial" concentration, as well as activities not permitted by the federal government. He mentioned particularly speculation in real estate by financial institutions that could undermine their safety and soundness.
Volcker advocated amending the regional provision to lead to full interstate banking within a few years. He said he agreed that states should take initiatives but added the federal government should impose a certain basic framework. Garn called Volcker's proposal on interstate banking "a nice little time bomb in the middle of my bill" and said he would bar it. Other senators agreed there should be no major changes in the bill that could lessen chances of passage and acceptance by the House.
Isaac, making his final appearance before the committee as FDIC chairman, spoke with unusual candor about the situation. Even though the vast majority of banks are in good shape and bank profits reached $15 billion last year, he said the strains of the federal deficit, back-to-back recessions and inflation followed by disinflation are affecting small banks in particular.
At yearend in 1983, there were 642 banks on the problem list and 48 failures; in 1984, 848 problem banks and 79 failures. Listed banks range from those with marginal problems to those considered to have less than a 50-50 chance of survival. If failures continue at the same rate, 88 banks could fail this year. About half of the failures result from the economic climate or bad management, and the other half are attributable to fraud and insider abuse, Isaac said.
As a parting shot, Isaac declared he would like to see Congress repeal the Bank Holding Company Act, the Glass-Steagall Act and the McFadden Act, which are the foundations of the modern banking system. These statutes are designed to prohibit excessive concentration, to separate banking from commerce and to restrict geographic expansion.
Admitting that repeal is a political impossibility now, he named his three legislative priorities as reform of deposit insurance to include risk-based premiums so that the institutions that take the biggest risks pay the highest premiums; additional powers for banks, including insurance and real estate investments, and interstate banking.
Isaac also supported redefining any institution that calls itself a bank and takes deposits as a bank, and requiring FDIC insurance for such institutions. He backed a possible merger of the FDIC and the Federal Savings and Loan Insurance Corp., and an extension of non-cash government aid to ailing thrifts of up to 10 years.