No Holiday For The Banks

If the health of the U. S. banking industry is any gauge of the economy, the current recession got its start about a year ago. Loan write-offs began climbing almost from the beginning of 1990. Bank earnings slumped. Bank stocks plunged. Now, with the economy in a bona fide downturn, many bankers are bracing for more rough times in 1991.

It's true that U. S. banks have identified most of the bad commercial real estate loans that plagued them last year. Still, loan losses traditionally rise in a slump. And many banks still have a stable of risky loans on their books, including some $150 billion that financed 1980s leveraged buyouts, which could unravel if the recession becomes more severe.

And don't forget the consumer. Household borrowing was strong for much of the 1980s. But consumers now are pinched. With a softening economy and rising unemployment, the number of delinquent loan payments is rising. At the end of 1990's third quarter, 5% of the nation's residential mortgages were at least 30 days overdue, up from 4.5% in the previous quarter. And personal bankruptcies, which account for half of credit-card loan losses, are expected to increase by 7% this year.

SLIM PROFITS. The crisis in the Middle East isn't helping. Right after Iraq invaded Kuwait and gasoline prices soared, consumer confidence plummeted. Households put off making big purchases, and loan demand sank. That's a continuing blow for many banks, which depend on robust retail operations to offset their losses from commercial lending. "The key to 1991 is a solution to the Persian Gulf crisis," says John G. Medlin Jr., president and CEO of First Wachovia Corp. in Winston-Salem, N. C. At best, says Thomas H. Hanley, analyst at Salomon Brothers Inc., the 35 biggest banks could eke out a 2.5% profit gain in 1991. That isn't terrific. But it may be welcome news to many bankers, since earnings tumbled 26% last year.

Bankers are bound to be watching Washington as much as the bottom line in 1991. The Bush Administration will unveil several proposals early this year to change the way the banking system functions. The package will likely include a plan to overhaul the federal insurance fund that reimburses depositors when banks fail. The White House also wants to repeal some of the Depression-era regulations that govern banks. The Glass-Steagall Act of 1933 is a prime target. The law bars banks from other financial activities, such as underwriting and selling securities, mutual funds, or real estate. Bankers have longed to diversify into these potentially lucrative businesses. But the Federal Reserve Board has lifted the ban for only a few big banks in the past couple of years, and then only for underwriting stocks and bonds.

Whatever the strategy, it's clear that banks have to find new ways to make money. U. S. banking has lost its competitive edge in international markets. Under pressure to cut costs, many U. S. banks have withdrawn from foreign lending. And now, the industry is under siege at home, too. Both Ford Motor Co. and General Electric Co. rival the lending capacity of money-center banks through their credit divisions. And American Telephone & Telegraph Co. struck at the heart of retail banking last year by issuing a no-fee credit card.

To complicate matters, the deposit insurance safety net needs repairing. The Federal Deposit Insurance Corp. estimates that 170 to 200 banks could fail this year, vs. the 180 that closed last year. As a result, the insurance fund will shrink by more than 50% in 1991, to $4.2 billion. FDIC Chairman L. William Seidman wants to increase the premiums that banks pay to 23~ for every $100 of deposits from 19.5~. He also wants to charge banks a onetime assessment equal to 1% of their deposits. That's one reason why few analysts expect strong bank earnings in 1991.

Bankers may howl that the refunding will fall mostly on their shoulders. But after the savings and loan debacle, lawmakers are in no mood to saddle taxpayers with another bailout. Indeed, there's growing fear among lawmakers that the cost of the thrift bailout may go beyond $500 billion. The Resolution Trust Corp., which is charged with liquidating assets of failed thrifts, sold off many of its better properties last year. That means it may need more money from Congress to offer better financing or other sweeteners to attract buyers for the remaining pile of securities, loans, and real estate that was seized from thrifts.

The Administration also will probably put some limits on what depositors can expect from the insurance fund. The Treasury, which is cobbling together a blueprint for banking reform, isn't likely to change the $100,000 ceiling at which deposits are protected. But it may suggest limiting coverage to three accounts per individual. The American Bankers Assn. says that such a rule would be too hard to administer. Instead, the ABA advocates higher capital requirements for banks. That would provide an extra cushion to absorb greater losses before banks fail and force the insurance fund to pay off depositors.

'SHELL-SHOCKED.' As for winning the right to enter new businesses, bankers aren't holding their breath. "Congress is shell-shocked by the S&L crisis," says Representative Charles E. Schumer (D-N. Y.). Thus, "any attempt at giving banking new powers will be an uphill fight." And bankers themselves are so preoccupied with loan problems that they haven't lobbied aggressively.

That doesn't mean, however, that Congress won't remove some of the regulations on banks. The McFadden Act, a 1927 statute that prevents banks from setting up branches out of state, looks particularly vulnerable, since many overlapping state prohibitions have already fallen. This year, for instance, California's interstate banking ban ends. Such changes may not brand 1991 as banking's year of reform. But they could at least get the trend rolling.

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