US watchdog on alert to forestall more bank failures

Sitting in his shirt sleeves behind a highly polished circular desk, C. T. (Todd) Conover decides the fate of national banks.

As comptroller of the currency, Mr. Conover regulates 4,500 nationally chartered banks which account for 60 percent of US banking assets. The former management consultant looks over the shoulder of such financial giants as Citibank, Bank of America, and First Chicago.

In addition to approving routine matters such as name changes and new branches, the Office of the Comptroller of the Currency has the power to close banks or to facilitate mergers into stronger institutions if they are in danger of failing. Earlier this week, for example, Oklahoma National Bank & Trust was taken over by a stronger Oklahoma City bank after the comptroller determined that Oklahoma National was near collapse.

The comptroller is likely to face more such tough calls in the next few months. The quality of bank loans is suffering as corporate profits lag and a variety of countries that are major bank borrowers struggle to meet loan payments.

At the same time, a new banking bill that cleared Congress last week will let both banks and savings-and-loans offer a new account designed to be fully competitive with higher-interest money market funds. The accounts are expected to let banks and S&Ls win back deposits lost to money funds, but will also trim their profits.

''Profits will decline'' as banks pay more to depositors, unless the institutions can cut operating costs, raise prices on services, and rearrange loan portfolios to bring in enough income to support a fatter return for savers, Mr. Conover said in an interview.

''The problem is time. You are locked in on (loans). You have got a lot of mortgage loans and I don't know what you do'' to boost the return on those, he added.

With banks having to pay more to savers and with some corporate loan customers in bad shape, ''I think we are looking toward more difficult times in later '82 and '83,'' Mr. Conover said. ''I think we will see additional bank failures this year, and I think we will have failures in '83.'' Including Oklahoma National, this year there have been 33 failures of institutions insured by the Federal Deposit Insurance Corporation, as against 10 for all of last year.The number of failures for 1982 is already the highest since the 48 failures in 1940.

Mr. Conover is not alone in this assessment. H. Johannes Witteveen, chairman of the Group of Thirty, an internationl bankers' organization, writes in the group's new annual report that ''growing weakness in the financial condition of many borrowers is likely to produce a stream of 'problem' cases among both borrowers and lenders - both countries and banks.''

Even when the economy turns up, the banks' woes will not be over. That is because bank customers weakened by the recession may not go bankrupt and default on their loans until after the recovery starts. ''The number of problem banks and the level of loan losses (peaked) in 1975 and 1976 after the economy had essentially recovered from the doldrums of the 1973 recession,'' Mr. Conover said.

''While there are real problems to be dealt with . . . that does not mean that the industry that needs to cope with them isn't fundamentally sound,'' he cautioned. In fact, he added that while bank profits over the intermediate term will be depressed, in the July-September period they were strong because the interest rates banks had to pay to raise money were coming down faster than rates banks charged their customers.

The challenges banks are expected to face in the coming months will put greater demands on the comptroller's oversight activities. The agency has come under fire from Congress for failing to take tougher measures against Penn Square Bank, which was declared insolvent on July 5, after being under scrutiny for two years. The episode ''raises new doubts about the effectiveness of the federal bank supervisory system,'' Fernand J. St Germaine (D) of Rhode Island, chairman of the House Banking Committee, said at a hearing last week. While the bank was being mismanaged, he charged, ''the Office of Comptroller continued to search its manual for the chapter on 'go-go' banking.''

Mr. Conover has taken a number of steps to improve the effectiveness of the Comptroller's office. ''We are trying to focus our resources on the parts of the banking system which represent the greatest threat to the system as a whole,'' he said.

So that more attention can be given to the most troubled banks, the office is shifting examination resources away from small, well-managed banks. Starting in January, these banks will receive a comprehensive examination every three years, rather than every year, as is the case now. But examiners will pay a short visit to each bank every year.

The comptroller's critics have argued that the office should disclose more information about the condition of various banks to prevent unsuspecting customers, investors, and other banks from being hurt.

Some bankers oppose additional disclosure, lest it harm confidence in the banking system. But Mr. Conover says he favors increased disclosure. In 1983, the Comptroller's office will begin making public additional information on past-due loans and the maturity and interest rate structure of its deposits. As a result, ''the customer or investor or other bank that is doing business with a particular bank can make a better decision and the marketplace can be more efficient,'' Mr. Conover said.

Nevertheless he contends that the nation could not afford a banking system where some institutions do not fail. ''We can't have a fail-safe regulatory system. It would be unbelievably expensive, not just in terms of the number of people .. . . You would have to supervise it so closely you would take the risk out of the system. . . . If there is no risk, there is no return, so investors would not be willing to provide new capital.''

National Banks receiving special supervisory attention (As of June 30) Category/description Number of banks Category 3: banks that 260 have a combination of fi- nancial, operational, or compliance weaknesses ranging from moderate to severe to unsatisfactory Category 4: banks that 32 have an immoderate vol- ume of serious financial weaknesses or a combi- nation of other condi tions that are unsatisfactory Category 5: banks that 9 have an extremely high or near-term probability of failure Source: Comptroller of the Currency