BOSTON, JAN. 11 -- The nation's top banking regulator sought to reassure New England governors about their troubled banks today and called for creating a special new fund, drawing on public and private capital, to shore up weak banks before they fail.
L. William Seidman, chairman of the Federal Deposit Insurance Corp., also promised during a meeting with the six regional governors that he would explore ways to ease the region's credit crunch and prevent the problems of the banks from damaging the New England economy.
Seidman also used the meeting to promote a banking industry plan that is rapidly gaining favor in Washington: pumping money into troubled banks to keep them from going broke.
The proposal is similar to what the government did to keep banks in business during the Great Depression, when an agency called the Reconstruction Finance Corp. was set up to buy stock in ailing banks.
Several variations on the plan are being discussed by congressional, administration and banking industry leaders as a way to take some of the burden of bank failures off the FDIC. The cost of cleaning up 800 bank failures in the last four years is rapidly depleting the FDIC fund.
Even under optimistic economic forecasts, the FDIC will have only $4 billion left by the end of this year. If the recession proves to be worse than expected, the FDIC could run out of money, forcing the taxpayers to start picking up the tab for bank failures.
To avoid the need for a taxpayer bailout of the FDIC, Seidman said the banking industry and the government should set up a fund to invest capital in troubled banks. The money would make up for losses the banks have suffered on bad loans, enabling them to remain in business.
Leading advocates of the plan include the Association of Bank Holding Companies, a trade group headed by President Bush's old college roommate, former U.S. representative Thomas (Lud) Ashley. Ashley said the proposals have gained support rapidly in the last few weeks and still are evolving as officials suggest ways to bolster the banking system.
The basic idea, according to Ashley, is to require all banks to pledge a small amount -- perhaps one-half of 1 percent of their assets -- to invest in troubled banks. The investment fund would be administered by the FDIC, which would decide which banks might be saved with an investment of new capital and which ones would be taken over.
Seidman has been floating the idea that the FDIC might provide part of the cash to invest in troubled banks. He said it would be cheaper to put a small amount of new capital into a troubled bank than to let it go broke and dump all its troubles on the FDIC.
That strategy would represent a fundamental change in the mission of the FDIC. The agency now is dedicated to protecting depositors, but it would be bailing out bank owners under the new approach.
In yesterday's sessions, the plan drew favorable responses from the New England governors, who met amid the gloom of a regional economic recession and banking crisis.
"It's an idea I like in concept," said Massachusetts Gov. William Weld. Weld, the host for the meeting, said the idea was appealing because such a fund would be stronger than either the public sector or private sector working alone.
Seidman told the governors there are several healthy banks interested in buying the Bank of New England, which was taken over by the FDIC last Sunday. Seidman met earlier in the day with Lawrence Fish, who was installed by regulators as president of Bank of New England last year and is continuing to run it.
The governors expressed unanimous support for Seidman's handling of the Bank of New England, but they lobbied hard for increasing commercial lending in the region. New Hampshire Gov. Judd Gregg has been among those complaining loudest about a scarcity of credit.
Seidman said the need for more credit was "obvious" and acknowledged that some bank regulators, reacting to the excesses of the 1980s, have been "overzealous," prompting bankers to become overly cautious about making loans.
Connecticut Gov. Lowell Weicker praised Seidman for his expertise and swiftness, saying: "He is not the problem; he is trying to treat the symptoms."
Also in attendance at the meeting in Weld's office were governors Bruce Sundlun of Rhode Island, John McKernan of Maine and Richard Snelling of Vermont.
Staff writer Jerry Knight contributed to this report from Washington.