The troubles of Old Court Savings and Loan Association have renewed the debate over the viability of private deposit insurance funds.
Maryland is one of four remaining states with private insurance funds for state-chartered S&Ls, and state officials were among those who testified in support of the funds at congressional hearings held after the collapse of Ohio's fund.
State banking officials in North Carolina, Massachusetts and Pennsylvania yesterday said that they are prepared to prevent the run on Old Court from spreading to their S&Ls.
But some analysts questioned whether the private insurance systems could maintain public confidence as they now exist, and they suggested a variety of reforms.
State officials argue that people should not generalize about other funds because of isolated, and very different, crises in Maryland and Ohio. The other states with private insurance funds say theirs are closely watched and have access to enough cash to stop a run.
But some critics say the private insurers simply do not have access to the amount of cash required to stop a run and prevent it from spreading.
The private insurance corporations were created by state law, but are owned by the member S&Ls and are not financially supported by the states. Unlike the Federal Savings & Loan Insurance Corp., the private insurers cannot borrow from the U.S. Treasury.
"No state system can be as sound and secure as the federal system," said Andrew S. Carron, a vice president with Shearson Lehman Bros. Inc. "The fact is, the private insurers don't have an unlimited source of money."
North Carolina's state regulators would have prevented an S&L from expanding as rapidly as Old Court did, said Donald R. Beason, president and chief executive of the Financial Institutions Assurance Corp., which insures state-chartered S&Ls in that state.
But if a run were to start, the FIAC could stop it because of the size of the insurance fund and the quality of the assets, Beason said.
More important, North Carolina requires its state-chartered institutions to have borrowing agreements with the Federal Reserve System so they can turn to the Fed in an emergency, he said.
"If there were a liquidity problem, the Federal Reserve would fund them," Beason said, adding that state agencies "ought not to allow private insurance without Federal Reserve agreements."
Massachusetts regulators sent letters out Friday to all state-chartered S&Ls "encouraging" them to file documents with the Fed to qualify for borrowing, said Paul E. Bulman, state commissioner of banks. Many S&Ls have filed documents with the Fed or have agreements with other major banks enabling them to borrow in a crisis.
"Safety and soundness, in any reasonable analysis, is not an issue in Massachusetts," Bulman said. State regulators and private institutions have "the tools, the liquidity, the access to funds to meet any need . . . ."
The Pennsylvania Savings Association Insurance Corp. and state regulators intend "to spot trouble before it goes to far," said Sandra Dunkelberger, spokeswoman for the state Department of Banking. And if a run were to start in Pennsylvania, "The funds would be made available so withdrawls could be honored without panic," she said.
The only way to stop a run is to drown depositors with cash the way you would "dump water on a fire," said Bert Ely, a corporate financial consultant. The trouble is that private insurance corporations "do not have the liquidity cash available to handle a big run," he said.
Ely suggested that private deposit insurance funds band together across state lines and with other types of insurance funds to spread the risk more widely.
Even with good regulation and healthy institutions, the private corporations do not have enough cash to stop a run, said Carron, who wrote extensively on S&Ls while a senior fellow at the Brookings Institution. "The only entity that does is the federal government," he said.
Many state officials blamed the press for "inflammatory headlines" that shook public faith in Old Court. "The only way a run can happen is through the press," Bulman said.
"If the public doesn't have confidence, it can't work," Beason said.