As Northeast Banks Falter and Fail, Confidence Plummets

WHILE Washington and the rest of the country ask whether or not the United States is headed for a banking crisis, there is no such debate in the Northeast. The crisis is here, and has been for the past year.

Analysts say 15 banks and thrifts closed in New England in 1990 - 12 in Massachusetts alone. On Friday, the struggling giant Bank of New England Corporation (BNE) announced fourth-quarter losses that could reach $450 million. The situation is also serious in New York and New Jersey.

Public confidence in the banking system, already wavering, was dealt a heavy blow last week when new Rhode Island Gov. Bruce Sundlun closed 45 privately insured credit unions and banks after the insurer went broke. The shutdown affected 300,000 accounts with deposits of $1.7 billion.

``I think confidence has been decimated to say the least,'' says James Moynihan, managing director of the Northeast bank stock division of Advest Inc. He says he has been deluged with calls from people asking about the health of specific banks.

The closings in Rhode Island are not likely to be repeated in many other places. Most institutions are federally insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), which protect deposits up to $100,000. While most of the banks and credit unions that were closed will likely obtain federal insurance, 11 credit unions holding $1.1 billion in deposits do not qualify, the NCUA says.

All eyes now are on Bank of New England, which has been in grave condition for more than a year now. The bank, with $23 billion in assets, is saddled with $2.8 billion in nonperforming assets - mostly bad real estate loans - which the bank said Friday could grow by another $500 million.

BNE is considering a plan whereby its bondholders would trade their $700 million in bonds for $100 million in new bonds, stock, and a 94 percent equity ownership position in the bank. If the deal goes through, it would eliminate the bank's debt and increase its capital by about $600 million.

But the plan could be endangered by the losses announced Friday, which could wipe out the stockholders' equity of $255 million and make the company insolvent. This would force a federal takeover.

A recent report to the US House of Representatives called the BNE the most troubled big bank in the country.

Gerard Cassidy, executive vice president of Tucker Anthony, a bank analysis firm, says the government could have taken over BNE last fall, but the size of the huge bank meant closing it down might have been too great a shock to the banking system.

``I would say if the economy in New England does not start to improve, the probability of some government assistance to the Bank of New England is very high,'' Mr. Cassidy says. ``That could include taking it over, infusing capital with taxpayer funds, or selling it to another bank.''

Mr. Moynihan predicts that when all is said and done, 30 banks and thrifts in New England will have closed, most of them with assets of less than $1 billion. He says the situation is most serious in Connecticut, with Massachusetts and New Hampshire close behind. Cassidy predicts that the total number of failures will reach 50 institutions in the Northeast.

The crisis began when regional banks invested heavily in the real estate boom in the mid-1980s. When the boom ended, banks were loaded with unsold and unleased condos, malls, and office buildings. Cassidy says property values have since fallen from 10 to 40 percent, depending on the type of property.

A similar crisis could occur elsewhere, Cassidy warns. ``Any area of the country experiencing a rapid acceleration in real estate values, and that has a banking industry that has lent into that appreciation, will probably have problems,'' he says.

Analysts and federal regulators alike will be closely watching regional banks' reports of fourth-quarter performance. Several large banks are expected to post significant losses.