FDIC Proposing Doubling of Required Funding for Banks That Make Risky Loans -

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

[Fair Use: For Educational/Research Purposes Only]


Jan 25, 2000 - 07:12 PM

FDIC Proposing Doubling of Required Funding for Banks That Make Risky Loans

By Marcy Gordon - The Associated Press

WASHINGTON (AP) - The Federal Deposit Insurance Corp., concerned about its biggest losses from bank failures since the early 1990s, is proposing doubling the minimum required funding 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. The eight failures and another one in late 1998 cost the FDIC about $1 billion last year - 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.

In a speech last November, Donna Tanoue, the FDIC chairwoman, floated the idea of increasing the required capital that banks and thrifts doing a lot of subprime lending must have on hand.

"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 a federal government shutdown in Washington due to the East Coast snowstorm, 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 proposal applies to all forms of consumer credit, including home mortgages, credit cards, auto loans and personal loans.

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 bank based in Keystone, W.Va., that grew by paying high interest rates to attract capital from across the United States.

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, with losses approaching 70 percent of the bank's assets. Federal regulators, who closed the bank in September, said they found evidence of apparent fraud that resulted in the depletion of its capital. They alleged, for example, that $515 million in loans fraudulently remained on Keystone's books after they had been sold.

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 capital requirement 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.

Through most of the 1990s, there were fewer than 10 bank failures a year. But in 1992, at the height of the banking crisis, 122 banks failed, mostly in Texas and New England as their oil and real estate booms, respectively, collapsed.

-- snooze button (alarmclock_2000@yahoo.com), January 26, 2000


Oh!Man that makes feel a whole lot better!

-- James (brkthru@cableone.net), January 26, 2000.

Could be--- me, you, us, them,elvis,or The Big Cigar.

-- James (brkthru@cableone.net), January 26, 2000.

Moderation questions? read the FAQ