The chairman of the Federal Deposit Insurance Corp. said yesterday that the plunging price of oil is unlikely to trigger a major bank failure in Texas, but acknowledged that it is "not out of the realm of possibility."
L. William Seidman said that, even under the most pessimistic of scenarios, however, the $18 billion fund that insures deposits at nearly all 15,000 U.S. banks does not face any serious problems.
In an interview, Seidman also said that the agency is fighting an attempt by the Office of Management and Budget to assert jurisdiction over the FDIC's budget and hiring and to approve any FDIC spending that exceeds the budget. The FDIC, which also supervises about 9,000 state-chartered banks, is funded entirely by insurance premiums paid by the banks.
Seidman said that how low the price of oil goes and how long it stays there will largely determine how seriously Texas and other energy-state banks will be hurt. "If oil should fall to $9 a barrel, stay there for two weeks, then move back to $15 or $20 a barrel, there will not be a material effect on the system," he said.
"On the other hand, if prices remain very low for an extended period of time," the pressure on banks will be greater, Seidman said. But "under any forseeable circumstances, the fund is more than adequate," he said.
The price of crude oil fell below $10 a barrel briefly yesterday, but rebounded and closed the day above $11. In December, crude-oil prices were about $26 a barrel.
Bond-rating agencies have lowered the credit rankings of a number of major Texas banks, mainly because falling oil prices will make it difficult for many of their borrowers to repay their loans on time. Yesterday, MCorp., a big Dallas bank with assets of about $23 billion, announced that it would add $210 million to $220 million to its loan-loss reserves in the first quarter as a buffer against energy-related bad loans.
The addition to the loan-loss reserves, which is taken directly from earnings, will cause a first-quarter loss of between $120 million and $130 million, according to Gene H. Bishop, chief executive of MCorp.
Drilling and exploration companies and the firms that service them are hardest hit by the sharp decline in crude-oil prices. On the other hand, some oil refiners will be helped.
Seidman, commenting on OMB's attempt to assert jurisdiction over his agency's spending, said the FDIC needs to "have the freedom to act fast," as it did during the near-failure of Continental Illinois National Bank two years ago. Its ability to respond quickly in a crisis would be damaged if OMB had to approve actions that were not contemplated in the budget, he said.
He said that the Office of Management and Budget, in making its claim, cited the Gramm-Rudman-Hollings budget-balancing law and a 1950 law that dealt with how agencies spend their funds.
OMB also maintains that it has similar authority over the Office of the Comptroller of the Currency, the Treasury agency that supervises federally chartered banks. The comptroller's office is funded by examination fees paid by national banks.
OMB so far has not tried to control the spending of the Federal Reserve Board, which regulates several thousand state-chartered banks that are members of the Fed system. Like the FDIC and the comptroller's office, the Fed also receives no appropriated funds.
Seidman said he finds it "unusual that OMB wants to administer banks' money." He said that, by law, none of the funds the FDIC receives goes into the general Treasury. In normal times, 60 percent of whatever funds the FDIC does not spend in supervision or liquidation of failed banks is returned to the banks and the remainder is added to the insurance fund. CAPTION: Picture, FDIC Chairman L. William Seidman said the $18 billion fund is sound and faces no serious financial problems. By Lucian Perkins -- The Washington Post