The Federal Deposit Insurance Corp. fund that backs deposits in nearly all the nation's banks is growing, despite a record number of bank failures last year and what is expected to be another record this year.
Nevertheless, FDIC officials are concerned about the types of deposits it already has committed itself to cover or might be required to cover in the event of a bank's failure. The FDIC long has been concerned about so-called brokered deposits. More recently it has become worried by deposits in foreign branches of U.S. banks and by standby letters of credit, which a federal appeals court has ruled are deposits.
Last week the Justice Department agreed to ask the Supreme Court to review that ruling. If the ruling is upheld, the agency worries, it might have to raise deposit-insurance premiums to cover its added risk.
Standby letters of credit are trade-related guarantees issued by a bank on behalf of a customer. If the customer defaults on an obligation -- for example, failing to pay for goods received -- the bank "stands by" to make good on that obligation. The bank receives a fee for issuing the letter on behalf of a customer.
Letters of credit do not show up on a bank's books. Because they are "contingent liabilities" -- meaning that the bank must pay only if the customer defaults -- letters of credit show up only in footnotes to bank statements.
Penn Square National Bank of Oklahoma City, which failed in July 1982, issued a standby letter of credit on behalf of Orion Manufacturing Co., an Oklahoma oil production company that bought equipment from Philadelphia Gear Co. When Orion failed to pay, Philadelphia Gear presented its $145,200 letter of credit to the FDIC -- the receiver for Penn Square.
When the FDIC refused to pay, Philadelphia Gear took the agency to court and the 10th U.S. Circuit Court of Appeals ruled that the standby letter of credit was a deposit and should be given the same $100,000 protection as a checking account.
Banks have issued tens of billions of dollars of standby letters of credit and the FDIC would be on the hook for a lot more if the Supreme Court does not reverse the lower court.
Last week FDIC board member Irvine Sprague, who is expected to leave the agency soon, said that banks should be required to pay insurance premiums for deposits held in their foreign branches. He said that since regulators made clear in last year's rescue of Continental Illinois National Bank that no big U.S. bank can be permitted to fail, foreign depositors have the same protection that U.S. depositors do.
In failures of smaller banks, the FDIC has paid the legal limit -- the first $100,000 in depositors' accounts. To recover more than that, they stand in line with other creditors. The rescue of giant Continental shows that foreign and domestic depositors of big U.S. banks have de facto insurance coverage for their entire deposit, Sprague said.
He suggested that overall deposit-insurance premiums be lowered -- say from 1/12th of 1 percent to 1/15th of 1 percent -- but levied on all deposits, not just domestic ones. That would aid smaller banks and force bigger banks -- which often have more foreign than domestic deposits -- to pay a fairer share.
STILL WAITING . . . The White House still has not named successors to C.T. Conover, who resigned last month as comptroller of the currency, or FDIC Chairman William M. Isaac, who has promised to stay until a successor is confirmed by the Senate. Sprague, who was chairman under President Jimmy Carter and switched seats with Republican Isaac after Reagan was elected, also wants to leave. Isaac's term as FDIC board member expired more than a year ago and Sprague's was up last winter. H. Joe Selby, the deputy comptroller for bank supervision, has been acting comptroller since May 4.
FARM FAILURES . . . Traditionally, well-capitalized farm banks seldom failed, but the four-year crisis in American agriculture has changed all that. Most bank failures these days are occuring in the Farm Belt, and the FDIC is acquiring farm loans hand over fist. As an experiment, it is compiling them into $1 million units and selling the packages to "liquidate" the banks' assets.