One banker's view on saving the savings institutions

Compared with most commercial banks, the furnishings in the executive offices of the Provident Institution for Savings here are, to put it bluntly, cheap-looking.

Garth Marston, chairman of this oldest of the nation's chartered savings banks, offers no apologies for that. Like most of the nation's thrifts, the 166 -year-old institution is in financial trouble.

''We really didn't feel it would be proper to spend the money on any sort of plush thing,'' said the former chairman of the Federal Home Loan Bank Board, the regulatory agency for federal thrift institutions.

The Provident is in good shape, compared with most of the other thrifts. But it has been losing money at a rate that would wipe out its net worth in seven years - barring any changes.

So Mr. Marston hopes for changes to save the thrift industry. He would like one or the other of these moves:

* A reduction in interest rates.

In fact, they were falling rapidly last week. Three-month Treasury bill rates have dropped to less than 11 percent.

Marston figures such short-term rates would have to drop to 101/2 or 91/2 percent and stay there for a couple of years to put most mutual savings banks and savings and loan institutions back in shape.

* Some sort of government financial assistance.

The cleanest way would be direct help in the form of an addition to the capital of thrifts in trouble, Marston says. Congress is considering legislation to bail out the industry with $8.5 billion in government funds.

Another method, he says, would be a revision and renewal of the All-Savers certificate for 1983. But this time, he argues, it should be even more generous from a tax standpoint and able to be offered only by the thrifts, and not commercial banks. The cost to the federal government in this case would be through reduced tax revenues. Mr. Marston sees an advantage in that it would encourage saving.

In the meantime, thrifts in serious trouble are being merged with healthier institutions. So far there have been only a few runs of depositors on financial institutions, none too serious. Experts predict that if interest rates do not drop further or there is no help for the thrifts, there will be literally hundreds more casualties in the next year or so.

Mr. Marston is anxious. ''The whole financial system is in a fragile position,'' he says. He is concerned that the problem of the thrifts, or default by some major country borrowers, or major corporate bankruptcies, might prompt some sort of financial panic in the money markets.

Referring to the bankruptcies of Drysdale Securities and Penn Square, he asked: ''What's next? It's the things you don't expect which throw you.''

The crisis in the thrift industry has prompted a larger change in attitudes among savings bankers than many may realize, if Mr. Marston and Thomas S. Zocco, president of the Provident, are any example.

Most thrifts got into trouble because of an imbalance in the maturities of their assets and their liabilities. They took short-term money, that is, savings deposits, and invested it in long-term investments, such as 25-year mortgages or long-term bonds. When interest rates went to record heights and stayed close to that elevation, the thrifts were locked into those 6 percent mortgages and gradually forced to pay a higher interest rate on their deposits. The ''spread'' between their cost of money and the income from investments disappeared and they went into the red.

Moreover, more and more savers were unwilling to subsidize borrowers by accepting lower-than-market interest rates. They fled to money market funds or other investments that paid higher interest rates. The Provident, for instance, has been losing about 5 percent of its deposits a year.

Mr. Zocco warns: ''We will no longer take the interest rate risk. We don't think it is fair.'' What that means is that Provident and probably many other savings institutions will no longer tie up their money in fixed-rate mortgages or other long-term investments. It will remain in the mortgage business. But it will offer only variable-rate mortgages, which means the homeowner has to take the risk of interest rates rising again, or it will sell immediately any fixed-rate mortgages to government institutions or other investors willing to take such long-term interest rate risks.

''The whole industry will be doing something of this nature,'' Zocco says.

In other words, house buyers face a new world. Until now they could hold on to a mortgage if inflation and interest rates increased. They got, in effect, free money as rising prices depreciated the value of their loan. Or they could refinance a mortgage if interest rates dropped, whereas the lender could not. ''It has always been in favor of the borrower,'' Zocco noted. But no more. ''We would be foolhardy to make that kind of investment again.''

In the meantime, Provident has cut its expenses. In the past three years, the bank has reduced its employees by some 20 percent and switched the staff from a four-day to a five-day week. It has moved from the 148th most efficient in the state to the third most efficient in terms of operating expenses. The Provident, says Zocco, will survive.