Bank Troubles Stir Political Debate

WITH the release of two new reports this week, Washington once again is discussing the economic strength of America's banks and its savings and loan institutions. Most experts say the economic problems banks face, while formidable, are far less serious than those that thrifts confronted when many required major government bailouts.

In addition, most experts say, the problems faced by numerous savings and loans still in private hands were anticipated by government officials and factored into their estimates of the cost of federal aid.

Treasury Secretary William Brady, appearing on NBC-TV's ``Meet the Press,'' says ``a vast difference'' exists between the present state of the banks and the situation savings and loans formerly faced. Banks have $200 billion in capital and $60 billion in reserve, Secretary Brady says, whereas ``the savings and loans had $10 billion when [they] got into trouble.''

Late last week the government's Office of Thrift Supervision reported savings and loan institutions that are still privately controlled lost $631 million from July through September of this year.

During the weekend, word began spreading in Washington that a congressional report on the state of America's banks, due for release yesterday, estimates that bank failures in the next few years may cost up to $63 billion in bailout money.

``The basic problem [for banks] is that we have had a period of very high building and very high debts and we are going to have to live with a period of adjustment,'' says William Seidman, chairman of the Federal Deposit Insurance Corporation (FDIC), also appearing on ``Meet the Press.''

The savings and loan figures may be new, but they do not represent ``new information,'' says Roger Kormendi, professor of business economics at the University of Michigan School of Business. ``Most of the bad S&Ls are now in the government's possession'' and federal officials already had been expecting to pay the bailout costs of the remainder of the unhealthy institutions in private hands, he adds.

S&L consultant Burt Ely agrees that the new figures are no surprise; nonetheless, he adds, ``overall you see an industry that is steadily getting weaker.''

The onset of recession plus the real estate decline in large sections of the United States are largely responsible for the $631 million S&L loss, experts say.

For many S&Ls the future is largely tied to the real estate market. If real estate rebounds before long, so too will ``a lot of the [S&Ls] that are in a holding pattern,'' Mr. Kormendi says.

The government divides savings and loan institutions into four groups, by economic strength. In figuring the costs of the S&L bailout, the Bush administration already has assumed that institutions in the two weakest areas will fail and will require federal assistance, Mr. Ely says.

Estimates vary widely on how much the S&L bailout ultimately will cost. One figure frequently heard in Washington is $500 billion. Over the weekend Mr. Seidman estimated the cost at ``somewhere between $175 and $200 billion. Add to that whatever interest you think is appropriate.'' The longer the government takes to complete the bailout, the more interest it will pay - and the higher the final cost likely will be.

Most experts say that despite their current financial straits, American banks probably will not require anywhere near as much federal aid as savings and loans. The bank cost is not going to be ``in the S&L range of $150 billion or more, but it will be a lot of money,'' says Robert Losey, professor of business administration at American University.

Within 18 months bank failures could empty the fund Seidman's agency has to pay off depositors in failed banks, Dr. Losey adds. Seidman admits the fund, at its lowest levels in half a century, is now inadequate; he is working on a plan to replenish it by about $50 billion, with the money to come from banks.

Seidman says the congressional report's $63 billion estimate for the cost of future bank failures is too high. He estimates that the cost to the federal government of bank failures in 1990 will be about $4 billion, and $5 billion next year.

Even if the congressional report's $63 billion estimate proved accurate, Seidman insists, his agency could handle the sum with only modest additional federal resources, once the $50 billion recapitalization program is complete.

Seidman's agency ``is taking a lot of steps to improve the situation,'' Losey says, ``but they're putting a happy face on things and hoping things will turn around.... The FDIC is going to have to admit that the problem [of potentially insolvent banks] is significantly worse than they're telling.''

Former Treasury Secretary William Simon, appearing on ABC-TV's ``Issues and Answers,'' says he thinks the US will avoid the collapse of a large number of banks. But he says it is not inconceivable that one or two large banks could become insolvent, adding that the government should work now to prevent such an occurrence; should they collapse, the recession could be deepened and extended, he adds.

Seidman says that the government is monitoring about 1,000 US banks that are financially shaky, down from 1,500 two or three years ago.

Beside the softening real estate market and national economy, banks also are beset by a rise in credit-card delinquencies, Losey says: ``They are the highest they've been in years.''