Bank Troubles Threaten FDIC

THE NEXT BAILOUT?

UNEASE is spreading through Washington and the United States banking industry following the decision by a number of major US commercial banks - including giant Chase Manhattan - to slash dividend payments and lay off employees. There is growing concern that if the US were to experience a major recession, a number of problem banks would be forced into receivership. That could quickly deplete the insurance funds of the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits up to $100,000. The upshot: Washington would have to mount another costly multibillion dollar bailout program, as occurred with the savings and loan industry.

Last Friday, Chase Manhattan Corporation, the parent of Chase Manhattan Bank, announced that its third-quarter dividend payment would be slashed from 62 cents to 30 cents, some assets would be sold off, and its staff would be reduced by 5,000 employees. Chase's actions were designed to increase its reserves against problem loans - mostly involving the slumping real estate market - by $650 million.

Also last week, Midlantic Corporation, one of the largest bank holding companies in New Jersey, announced that it would cut its quarterly dividend almost in half, to set aside $285 million for possible loan losses. And Southeast Banking Corporation, in Miami, completely omitted its third-quarter dividend.

Similar retrenchment steps by other US banks are expected this year. Bank regulators could be expected to welcome such actions as a way of shoring up the banking system at a time when the economy is slowing. But one result of building bad-loan cushions would be less money available for business or personal loans, which would further slow the economy. Banks have already tightened credit requirements on loans.

The capital that banks will need to offset possible losses will probably not come from new outside investors. As a stock group, the banking industry has ``been out of favor'' with investors for some time, reflecting potential real estates losses as well as the economic slowdown, says Lacy Shockley, an analyst with Smith Barney Harris Upham & Co. ``We're probably not going to see an upturn for the industry until there is a consensus feeling that we'll have a mild recession, and that it will be over quickly.''

It is precisely the threat of recession that is leading banks such as Chase to retrench. Bankers are quick to disassociate themselves from the troubles of the savings and loans. Banks earned a hefty $26 billion last year, unlike the loss-ridden S&L industry. Still, warning flags are flying: earlier this month US Comptroller General Charles Bowsher told Congress that 35 of 300 large US banks that were in financial trouble could fail.

Any major failure, or series of failures, could wipe out the insurance funds of the FDIC, which are currently below $13 billion, down from $18 billion in 1988. Commercial banks have $2 trillion in insured deposits.

With the goal of preventing a depletion of FDIC funds, the House of Representatives last week approved a bill to allow regulators to increase the insurance premiums paid by banks and thrifts.

Earlier in the month, Federal Reserve Board Chairman Alan Greenspan called instead for raising capital requirements for banks, as well as intensifying federal regulatory supervision.

``Unfortunately, there's no real momentum in Congress at this point to take a hard look at what caused the problems for the savings and loan industry in the first place, as well as problems occurring in banking,'' says Marshall Blume, a professor of finance at the Wharton School of the University of Pennsylvania.

Professor Blume is also concerned about the adequacy of regulatory supervision. ``If the federal government is going to guarantee deposits, then it is going to have to more carefully examine what those deposits are being used for,'' he says.

One new opportunity for some commercial banks came last week when the Federal Reserve System gave the go-ahead to J.P. Morgan & Co. to underwrite and issue stocks, something that had been precluded by the Glass-Steagall Act of 1933. However, the pace of stock underwriting has been very sluggish this year. -30-{et