No wonder Congress is suspicious of bank regulators. Every few months, it seems, the regulators add a few billion dollars more to the cost of the bank bailout and the probable hit en the Federal Deposit Insurance Corp.'s bank insurance fund, which runs busted banks and pays off depositors' accounts. Growing evidence that the regulators don't yet have a handle on the problem suggests more unpleasant jolts could be on the way. It seems increasingly likely that the fund may have to be bailed out by taxpayers, who lately are picking up the tab for the savings and loans.
In January, the FDIC said the insurance fund's assets at the end of 1992 could range from $3.6 billion in the black to $4.6 billion in the red. That's a big slide from the $18.3 billion the fund had at the end of 1987. Now, the FDIC says that the balance could range from a $3 billion deficit, if things are going well, to $11 billion in the hole (chart), if they aren't. The agency is asking for a $70 billion federal loan to bail out and resuscitate the fund.
WORST CASE. The fund numbers keep getting worse because the agency's outlook for the banks keeps growing more dismal. In January, under its most pessimistic scenario, the FDIC forecast that 440 institutions, with a total of $160 billion in assets, would collapse through 1992. On June 27, using updated economic data, FDIC Chairman L. William Seidman shook up lawmakers with an increase of $40 billion--or 25%--in the estimated assets involved, to $200 billion at 400 busted banks. The FDIC responds to carping about its shifting numbers by arguing that all predictions are elusive. Says Roger Watson, the FDIC's research director: "Seidman's an honest guy."
Maybe so. But it's a good bet that the size of the FDIC insurance fund's bailout will balloon still further. The Administration's $70 billion figure doesn't include interest, which could add an estimated $40 billion to $50 billion by 2006. Projected interest costs have inflated the $160 billion the government has borrowed for the S&L cleanup to $500 billion over 40 years.
The insurance fund itself may already be in even worse shape than the FDIC has been saying. Congress' General Accounting Office contends that the FDIC still overstates the fund's assets by posting losses too slowly. The fund waits until regulators move to close a bank instead of acting as soon as it becomes insolvent. By the quicker method, the fund's 1990 yearend balance would have been a bit more than half of the skimpy $8.4 billion posted last winter. The FDIC is now tacitly conceding the point: It recently lowered the 1990 balance by $2 billion.
UNDER WATER. Worse, the banking industry's health may be more precarious than the FDIC admits. Reason: Banks' capital cushions, which they use to offset losses, may be overstated. If banks carried assets at actual market value, rather than at the (currently higher) original cost, far more banks would be under water. Then, says Edward Kane, banking professor at Ohio State University, the insurance fund would show a 1990 deficit of $40 billion. True, the banks' plight is not nearly so dire as the thrifts'. Banks are better run, regulated, and capitalized. Even so, 1,000 banks have failed in the past five years.
Government officials claim that taxpayers needn't worry: The recovering economy will allow weak banks to grow out of their precarious positions. Healthy banks will eventually rescue the fund through increased deposit-insurance premiums. Regulators have already boosted the rate, effective July 1, to 23~ per $100 in deposits, up from 19 1/2~--a change that will net the fund $10 billion a year. Perhaps. But some experts warn that this is straining the system and that another premium hike could crimp lending, creating an economic slowdown and more bank failures.
Without convincing evidence to the contrary, the Cockroach Theory of Economics still seems applicable here: Once you've seen one piece of bad news, more will follow.