Taking From Weak Banks And Giving To The Rich

For many years, Polaroid Corp., like most corporations, tended to patronize banks that offered the best services at the lowest prices. But two years ago, with the once rock-solid fortress of the U. S. banking system displaying increasingly deep fissures, the Cambridge (Mass.) company began applying a new criterion: limiting its exposure to weak banks. It whisked hundreds of thousands of dollars out of a pair of troubled Texas banks right before they collapsed. Lately, Polaroid's early-warning system has paid off again. It successfully pulled out of a Bank of New England subsidiary before BNE failed on Jan. 6.

Polaroid is far from alone. The triple whammy of war, recession, and bank failures is causing hundreds of treasurers at major corporations to overhaul their dealings with banks drastically. Increasingly picky corporate depositors are putting their banks under a microscopic review and severing many longstanding relationships. MCI Communications Corp. closely monitors reports from bank-rating agencies. "We'll call up a bank's management and ask them what's going on," says Bradley E. Sparks, the telephone company's treasurer. "We're not reluctant to pull out of a bank when its ratings slip."

To the jeweler's eye of a chary corporate money manager, the biggest potentially disqualifying flaws among banks are rising nonperforming loans, thin capital cushions, and heavy loan exposure to the limping commercial real estate market.

FEAST OR FAMINE. While this policy overhaul may help protect corporate cash from the hazards of bank failures, it is not good news to many banks. The richest and safest banks will get richer and safer. "We are in 80 countries, and we make sure we are with the No. 1 or 2 bank in every country--first-tier banks, not second-tier," says Eugene P. Beard, executive vice-president for finance and operations at Interpublic Group of Cos., the large advertising concern. Such a policy, though, can injure perfectly healthy, often smaller banks below the top tier. More vulnerable banks could be weakened to the point of collapse. "It's a dangerous overreaction to seek out only the supersound banks," warns David C. Cates, chairman of Ferguson & Co., a Washington bank consultant. "It would be a damaging thing if it were to happen in spades."

Treasurers and bankers are already noticing a slow run on less healthy banks. According to a survey taken between last August and October by Prudential-Bache Securities Inc., an astounding 40% of corporate treasurers said they were yanking or planning to yank business from riskier institutions. The situation is a vicious circle. As more banks deteriorate, says Pru-Bache analyst George M. Salem, "this process picks up steam."

The Pru-Bache survey found many treasurers uneasy about a constellation of top-name banks. The losers' list contains Chemical Bank, Chase Manhattan, and Bank of Boston--all since hobbled by various difficulties--while winners include J. P. Morgan, Security Pacific, and First Wachovia (table). Citibank, the nation's largest, made both rosters: the bad one because of problem loans and thin reserves, the good one because the more optimistic treasurers liked its global reach and believed Washington will never let Citi go down. On Jan. 22, Citi announced an aggressive plan to cut costs and boost capital.

WIDENING GAP. While it's difficult to track an outflow of corporate business from specific banks, few doubt that top-ranked banks such as Morgan are benefiting munificently. Some bankers say Morgan has experienced a large inflow of corporate business over the past few months, which helped the bank earn a sweet $1 billion last year. That's a nice rebound from its $1.3 billion loss in 1989, when it wrote down bad loans to Third World borrowers. Says James J. McDermott Jr., research director at Keefe, Bruyette & Woods Inc.: "Morgan has the pick of the litter when it comes to corporate business."

One sign of the tiering in the market is the rate banks pay on their jumbo certificates of deposit--those over $100,000, bought mainly by companies and other big investors. Morgan is currently paying 6.9%. But banks on the order of Chemical and Chase are offering around 7.7% to attract buyers. The gap between tiers is widening.

Foreign depositors, who generally operate with less information than their U. S. counterparts, are even more afraid of weak U. S. banks. Just who is moving their money where can't be documented, but anecdotal evidence suggests that many foreign depositors are retreating from U. S. banks. Several Taiwanese bankers say Taiwan's central bank pulled many billions of dollars in reserves out of U. S. banks over the past several months, shunting much of the cash into Treasury bills and the rest to strong overseas institutions.

Federal insurance on deposits under $100,000 has tended to prevent individuals from pulling funds from weak banks. But company treasurers typically keep well over $100,000 in bank accounts. To be sure, the Federal Deposit Insurance Corp. has agreed to pay off amounts over $100,000 if the failed bank is so large that the depositors' losses would hurt the economy and undermine confidence in the banking system. The FDIC has promised to stand behind all Bank of New England customers to the last nickel. Still, corporate customers are well aware that the FDIC has no legal obligation to reimburse them fully. Just ask customers at smaller banks, whose demise the FDIC deems of lesser import than Bank of New England's. When Harlem (N. Y.)-based Freedom National Bank failed in November, dozens of churches and nonprofit organizations such as the National Urban League lost millions. Despite a barrage of criticism that Freedom's depositors were being unfairly discriminated against, the FDIC agreed to reimburse the over-$100,000 deposits at only 50~ cents on the dollar. Such cautionary tales have an effect on people such as MCI's Sparks. He now makes sure that, when making deposits in small banks, he keeps under the $100,000 cap. "We don't want to be caught over the limit if the FDIC came into the bank at midday and shut it down," he says. Other treasurers are simply staying away from small banks.

TAKE NO CHANCES. To many treasurers, moreover, it's not enough simply to know they can get all of their money out after a collapse. They still worry about embarrassment: Having to explain to the boss why they entrusted hard-earned funds with a wobbly guardian.

Some treasurers now believe that the best way to avoid mortification is to reduce all of their bank deposits and deploy their cash elsewhere. According to IBC/Donoghue's Money Fund Report, certificates of deposit grew at a mere 1% pace for the year ended Nov. 30, 1990, compared with 11% in 1989 and 13% in 1988. The volume of jumbo CDs shrank 10% last year vs. a growth of 5% in 1989 and 11% in 1988. The decline may be partly explained by decreased demand for bank loans and tighter lending standards in a recession. But Martha M. Wittbrodt, editor of the Donoghue report, thinks that a pullback from banks by major corporations is also an important factor. "All the bad news, like the problems of the Rhode Island banks and the Bank of New England, has an impact," she says.

Consider Centel Corp., a Chicago telephone company that is looking at shifting from short-term bank debt to longer-term bonds, even though short-term money is cheaper. "We are concerned about the situation in banking" and want more stable lenders, explains Eugene H. Irminger, Centel's chief financial officer.

To many experts, corporate treasurers' movement of funds to safe banks, or even away from banks entirely, is simply the free market at work. That is the rationale behind the argument that the FDIC, if anything, should reduce the $100,000 deposit insurance limit, which would help weed out marginal banks and get rid of overcapacity in the banking system. Trouble is, the frantic flight to quality under way right now may discriminate against sound as well as unsound banks and could end up doing more harm than good.

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