OT: FDIC proposes doubling funding (...biggest losses from bank failures since the early 1990s...)

greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread

http://www2.startribune.com/stOnLine/cgi-bin/article?thisStory=81318810

Published Tuesday, January 25, 2000

FDIC Proposes Doubling Funding

By MARCY GORDON / AP Business Writer

WASHINGTON (AP) -- The Federal Deposit Insurance Corp., concerned about its biggest losses from bank failures since the early 1990s, is proposing a doubling of the capital requirements for banks that specialize in risky loans to people with inferior credit histories.

Regulators have warned that the higher-interest loans, called subprime loans, can increase the risk of defaults for the deposit insurance fund. They played a role in some of the eight U.S. bank failures last year, which cost the FDIC about $1 billion -- its biggest annual hit since the regional banking crises of the early 1990s.

The failures, coming amid a booming economy, have worried regulators and lawmakers. Compounding the concern, the FDIC is predicting that as many as 20 banks could go under this year.

Donna Tanoue, the FDIC chairwoman, floated the idea of increasing the required capital for banks making higher-interest loans in a speech last year.

" I believe thrifts and banks with high concentrations of subprime loans should be required to hold more capital than the current rules now dictate. A lot more, " Ms. Tanoue told bankers.

Now, the FDIC has circulated a draft to the other federal banking agencies, including the Federal Reserve and the Office of the Comptroller of the Currency, which must all agree on a formal proposal to be put out for public comment.

" We know that they have a proposal out there for discussion purposes, " David Runkel, a spokesman for the House Banking Committee, said Tuesday.

Because of snowstorm-related federal government closures in Washington, spokesmen for the FDIC and other banking agencies couldn' t be reached for comment on the proposal. It was first reported in Tuesday' s editions of The Wall Street Journal.

There has been disagreement over the FDIC' s proposed definition of subprime borrowers, The Journal reported. Critics of the proposal have maintained that under the definition -- borrowers who have made two payments 30 or more days late or one payment 60 or more days late -- many community banks that lend to low- and moderate-income people would be adversely affected.

The FDIC says it has found about 150 banks and thrifts with significantly high levels of subprime loans. Together, those institutions hold about 5 percent of total banking industry assets.

The Banking Committee chairman, Rep. Jim Leach, R-Iowa, recently proposed legislation that would give the head of the FDIC more authority over troubled banks. His proposal was prompted by the failure last fall of First National Bank of Keystone, a large bank based in Keystone, W.Va.

The estimated $750 million loss to the FDIC insurance fund caused by Keystone' s failure could make it one of the 10 most expensive ever in this country. Federal regulators, who closed the bank in September, said they found evidence of apparent fraud that resulted in the depletion of its capital.

Leach has said there are indications the regulators may not have properly supervised Keystone when it engaged in risky financial strategies, and that the FDIC was stymied at key points by other federal banking agencies in its desire to examine the bank' s activities.

Leach didn' t immediately return a telephone call seeking comment Tuesday on the FDIC' s proposal.

The bank insurance fund, which backs each account up to $100, 000, has an adequate cushion -- now some $29 billion -- to cover depositors' losses.

-- Homer Beanfang (Bats@inbellfry.com), January 25, 2000

Answers

Uh-oh! The bank that loaned the Pres. and wifie money for their new home will have to keep more on the books...

-- Mad Monk (madmonk@hawaiian.net), January 25, 2000.

The Wall Street Journal also covered this today and said the $1 billion in losses were from only TWO closed banks - one of them Keystone. While this failure is not due to Y2K, it is still a useful warning about how easily the insurance fund can be depleted - 2 bank failures brought down the fund by about 3% last year. Looks like premiums to the banks will be up this year.

-- Margaret J (janssm@aol.com), January 25, 2000.

Doubling the capital requirements of some banks means basicly they expect twice as many problems as the current requirement should handle without their intervention.

They only have $1.45 per every $100 in deposits. They paid out $1 billion (out of the $29 billion they had set aside) to deal with TWO (2), count'em '2', bank failures.

Folks this is a tremendously serious situation. The party is not over, but it IS winding down and the next asct in this play will be entitled 'The Hangover'.

Currently the average household uses 95% or its 'disposable' income for servicing its debt obligations. With most household having more than one income to support the debt load this is a shockingly high %.

You gotta figure that when the next recession hits there will be a TON (TONNE) of personal bancrupcies in this country (USA). This will backfeed to the banks and credit card companies which hold this debt as 'assets'. In turn many of these banks will also go into bancrupcy, which will severely impact the capital available to support businesses, make new loans, etc.

95%

Think about that.

-- ..- (dit@dot.dash), January 26, 2000.


Moderation questions? read the FAQ