An article in yesterday's Business Section incorrectly described the action taken by federal banking regulators to aid banks in economically depressed areas. The regulators eased banks'capital requirements but did not change their cash reserve limits. (Published 7/ 9/87)
Federal regulators yesterday eased the cash reserve requirements for banks operating in economically depressed areas, signaling concern over the continuing rise in the number of troubled banks across the nation.
The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency announced that, effective immediately, any bank that can demonstrate it is suffering from an economic downturn rather than bad management will be permitted to let cash reserves fall below the level normally required.
The FDIC and the Comptroller of the Currency also removed limits on how far reserves could drop. They said cash reserve levels would be approved case-by-case, although no insolvent bank would be allowed to stay open.
The new rules significantly broaden a policy adopted in March 1986, when regulators unveiled what they called a "forbearance" plan to help troubled banks in farm and energy states restructure and get rid of bad loans. The rules now apply to banks in any state suffering an economic downturn.
The agencies also added two years to the maximum time limit that qualifying banks will have to restore capital to normal levels. Banks now will have to restore capital reserves to 6 percent of assets by Dec. 31, 1995.
Capital is the difference between assets and liabilities. It is intended as a cushion against losses from loans made by the banks. Normally the limit on lending by an individual bank is based on capital reserves. Under the forbearance rules, regulators have said that banks will be able to renegotiate certain troubled loans and continue to count them as assets, rather than write them off. The restructuring will boost bank assets for purposes of calculating how much money they can lend.
The regulators also extended the deadline for eligibility under the new policy to Dec. 31, 1989.
The American Bankers Association, the largest bank trade group, estimates that several thousand troubled banks would be eligible to take advantage of the new rules.
Regulators said one reason they broadened the forbearance policy is that fewer banks than expected had applied under the original plan adopted last year. Regulators said many banks feared they would be given harsh treatment if they applied. Yesterday's ruling was intended to allay such fears.
The easing of the regulations come as federal savings and loan regulators are under increasing attack for relaxed regulations intended to help ailing S&Ls. Congressional auditors say the policy, which allowed sick S&Ls to use unusual bookkeeping techniques, masked the problems at many institutions