Savings and loan industry officials are expected to propose a plan today to double the resources available to the Federal Savings and Loan Insurance Corp. to help bail out troubled savings institutions.
Two major industry trade organizations, The U.S. League of Savings Institutions and the National Council of Savings Institutions, will propose a new quasi-governmental corporation that would be empowered to buy real estate currently held by FSLIC, thus freeing more funds for the federal insurance agency and helping to improve its financial condition.
The organizations are expected to outline their proposal in testimony before the Senate Banking Committee, which resumes hearings today on reforming the federal deposit insurance system.
Officially the Federal Home Loan Bank Board, FSLIC's parent, says only that it has taken the recommendation under consideration, but unofficially, association executives say the board is very enthusiastic about the plan.
The reason for enthusiasm is simple. Faced with huge potential liabilities from failing thrift institutions, FSLIC runs the risk of running out of money even though insurance premiums have been increased recently. There is pressure from several quarters to merge FSLIC with the much stronger Federal Deposit Insurance Corp., which insures banks.
If Congress were to merge the two funds, the separate regulatory structure for thrift institutions and the bureaucracy that oversees it would cease to have a reason for being. Capital requirements and other regulations affecting commercial banks are tougher than those governing thrifts. By extension, if there were no longer a distinction between the regulation of savings institutions and commercial banks, the thrift industry eventually would be indistinguishable from the banking industry.
But FSLIC's chances of survival would be increased if it were in a healthier condition. FSLIC's current unobligated balance -- or excess of cash and liquid assets over total liabilities -- is about $2.7 billion, according to Office of Management and Budget estimates. In addition, FSLIC has between $2 billion and $3 billion of illiquid assets (assets that would be more difficult to convert to cash) in the form of property and buildings it has acquired during supervisory actions against ailing S&Ls. These assets are not counted in the unobligated balance.
The proposal is to create a new corporation that would buy these properties for cash, an accounting change that effectively would double FSLIC's available resources. FSLIC no longer would have to take care of the actual liquidation of properties but could concentrate on its primary task of merging and closing sick institutions.
The new corporation -- a federal savings and loan association -- would be funded with $800 million in capital from both the bank board and the Federal Home Loan Bank system of 12 regional banks, at no cost to the taxpayer. The new corporation's board initially would be named by the regulatory agency.
The corporation would manage the properties professionally or "warehouse" them for as long as it took to dispose of them on favorable terms if a suitable buyer could not be found immediately. In theory, this would prevent properties from being dumped on the market at distressed prices and would allow the holders to take advantage of cycles in the real estate market. A variation on this idea proposes establishing a holding company in each of the home loan bank districts, instead of a single institution.
The kicker is that the new corporation would be able to hire real estate professionals at market rates -- something budgetary constraints prevent FSLIC from doing. If its real estate dealings made a profit, the stockholders -- the district banks and the FSLIC -- would indirectly benefit. "We believe the best way to bring a high return from these assets in the free market is to have a strong, highly motivated company with a creative chief executive and a group of aggressive employes experienced in real estate marketing," said the league's vice chairman, Gerald J. Levy.
Although the creation of such a corporation would not require congressional approval, according to the league, some clarifying legislation might be needed for the district banks to capitalize it.
Also at today's hearing, the National Council is expected to plead for a system of risk-based insurance premiums calculated on an institution's performance, rather than the type of activities in which it engages. In other words, the group is arguing that thrifts should be rated, not on what they do, but how they do it. Regulators thus far have argued for the opposite approach.