One especially controversial provision of the Safe Banking Act would require each Federally insured bank to disclose in its annual reports the total amount of loans classified as "substandard," "doubtful," and "loss" at the last preceding visit by federal bank examiners.
"At the present time, it is only the banks and the regulators who know - with everyone else shut out," says the bill's chief sponsor, Rep. Fernand St. Germain (D-R.I.)
The bankers and the federal agencies that are supposed to supervise them - the comptroller of the currency, the Federal Reserve System and the Federal Deposit Insurance Corp. - want to keep it that way.
In the view of the American Bankers Association, for instance, making the volume of questionable loans public would be "highly inappropriate use of this data." The public, the ABA insisits, wouldn't "understand."
According to figures compiled by the Senate Banking Committee, the banks may havv growing cause for concern. The "classified assets" (primarily questionable loans) of the biggest banks under the aegis of the comptroller of the currency - a dozen institutions with assests of more than $5 billion - doubled in a two-year period, from a collective total of $7.1 billion in 1974 to $14.9 billion in 1976.
Bankers generally are placed on the comptrollers list of problem banks when their total "classified" assets exceed 80 per cent of their gorss capital funds, which includes stockholder equity and loan loss reserves. The classified assets, in turn, consist mainly of loans that examiners categorize as "substandard," "doubtful" or "loss". Most such loans do not as a rule become losses, but hard economic times can change that pattern and the classified loan total is considered an important indicator in assessting a bank's condition.
The comptroller's figures showed that total classified assets of 12 mammoth national banks rose from 58 per cent of capital in 1974 to 102 per cent in 1975 and then up to 107 per cent in 1976.
(The Washington Post reported last year that New York's First National City Bank was found in mid-1975 to have classified assets amounting to 114 per cent of capital and Chase Manhattan bank, in early 1975, to have had classified assets amounting to 97 per cent of capital.)
The smaller national banks on the comptroller's list had progressively smaller proportion of "classified assets." National banks with $1 billion to $5 billion in assets, for example, had classified assets amounting to 53 per cent of capital in 1976. National banks with assets of only $100 million or less had classified assets of 17 per cent of capital.
"They (the big banks) are in worse condition than the smaller banks, and they're undercapitalized," said one Senate banking expert.
The reports to the Senate Banking Committee also show:
A total of 886 state banks in the Federal Reserve System had "substandard," "doubtful" and "loss" loans in 1976 aggregating $3.6 billion - or 43.8 per cent of their capital. The 52 problem banks among them had $993 million in such loans - or 94.4 per cent of their capital.
A total of 8,666 state banks insured and supervised by the Federal Deposit Insurance Corp. had, in mid-1976, classified assets totaling $6.5 billion, or 34.4 per cent of capital. The 301 problem banks among them had classified assets totaling $1.8 billion - or 167.2 per cent of capital.
According to the ABA, the classfications ("substandard," "doubtful" and "loss") are simply "tools designed to tell bank supervisors and bank management which loans need special attention. As history shows, the relationship between loan classification and loan losses is remote," ABA governing council member Edward A. Jesser Jr. testified at a recent House hearing. "The disclosure of such information would also unnecessarily and unfairly jeopardize both existing and potential investor confidence in a bank due to a lack of adequate understanding of the meaning of the disclosed data."
Avocates of disclosure say such fears have always proved exaggerated. They contend that "the discipline of the marketplace" would make itself felt if the secrecy were stripped away, and would prove much healthier. "The agencies and the baks typically say that public confidence will be weakened each time the issue of disclosure comes up, but the sky hasn't fallen in yet," said one Senate Banking Committee lawyer.