THE EPIDEMIC of failures among savings and loan institutions has by no means ended.
Throughout the country there are more than 400 insolvent S&Ls still in business and taking deposits. Hundreds more are on the brink of insolvency. As they try desperately to rescue themselves, many of them are making increasingly risky loans. Ideally, the insolvent S&Ls ought to be closed down by the regulators. But that's expensive. These S&Ls' assets aren't sufficient to pay off their depositors -- that's what insolvency means -- and the difference has to be made up by federal deposit insurance. The federal insurance fund does not have nearly enough money to close down all the insolvent institutions. What ought the regulators -- and, more important, Congress -- do about it?
The dimensions of the S&L industry's distress are made clear in a couple of recent papers written by four economists on the staff of the Federal Home Loan Bank Board, the agency that regulates the S&Ls. In May, the four -- James R. Barth, R. Dan Brumbaugh Jr., Daniel Sauerhaft and George H. K. Wang -- published a count of insolvent and nearly insolvent institutions. Two weeks ago they brought out further data making the implications clearer.
The first wave of failures, in 1980-82, was the direct result of the drastic increases in interest rates. With their money tied up in mortgages at fixed, relatively low rates, S&Ls ran severe losses and many collapsed. Since 1982, the four economists report, the pattern of S&L failures has changed. The cause is no longer high interest rates, but high-risk loans going sour. In 1984, for the first time since it was founded 50 years earlier, the federal government's S&L deposit insurance fund declined substantially. By the end of the year it was about $6 billion. But the four economists calculate tha it could cost about $16 billion to close all of the 434 S&Ls that were then insolvent under the definitions known as generally accepted accounting principles.
That creates another range of financial dangers. The insolvent S&Ls know that the Bank Board can't come after all of them, because its insurance fund doesn't have the resources to close all of them. When an S&L has negative net worth, its managers may conclude that they have nothing to lose by taking further chances. The regulators are trapped.
It's Congress that is going to have to answer the basic questions. Should the regulations be enforced, and should the weakest S&Ls be forced to fold? The right answer is yes, but it will cost $10 billion more than the regulators have in the insurance fund.