CINCINNATI — The panic that gripped the privately insured savings and loan industry in this Ohio River city last spring has been largely forgotten in most of the country. But the residents here are reminded daily of the worst depositor crisis in the United States in more than 50 years.
Signs and banners proclaiming "Federally Insured," or "Member, FSLIC," are still prominent at dozens of financial institutions throughout this city--a continuing reminder of how consumers here lost confidence in any savings and loan, no matter how healthy, if their savings weren't backed by federal deposit insurance.
The federal insurance program played the role of savior during the Cincinnati crisis. Today, however, the federal system itself is coming under close examination.
A swelling chorus of politicians, bankers, economists, academics and regulators is calling for broad reforms to protect the financial health of the Federal Deposit Insurance Corp. and the Federal Savings and Loan Insurance Corp., which have guaranteed the savings of millions of Americans for more than five decades. The agencies insure accounts up to $100,000 should a financial institution fail.
The proposed reforms include a reduction in insurance protection and changing the way the deposit insurance pools are funded. Both the FDIC and FSLIC now raise their money by charging banks and savings and loans a flat fee based on the financial institution's size.
An estimated 190 million people in the United States have money in insured savings or checking accounts. The insurance funds, with a maximum combined value of about $25 billion, back more than $2 trillion in deposits at the nation's 18,000 banks and savings and loan associations.
The funds, forged in the fires of the Depression, have become linchpins of depositor confidence in the nation's banking system. Fund managers and industry executives love to boast that no insured depositor has lost a penny in the funds' history.
Today, though, these insurance funds are beset by a mid-life crisis. What has evolved, critics say, is an unfair, outmoded and underfunded system that encourages bankers to take excessive risk, allows hundreds of insolvent financial institutions that should be closed to remain open and cuts deeply into savings industry profits.
The distress is particularly evident at the FSLIC, the savings and loan insurance fund that would surely be bankrupted if regulators closed all the S&Ls that are technically insolvent--that is, their debts exceed their assets--but still open for business.
The FDIC, while its balance sheet seems stronger, backs deposits at more than 1,100 institutions classified by federal regulators as "problem banks" because of poor management and bad loans.
"Both funds are inadequate by tough accounting standards," said consultant William Ford, former president of First Nationwide Financial Corp. in San Francisco, one of the nation's largest thrifts.
Ford's point is that if all troubled banks and thrifts were required to put realistic market values on their loans, dozens of institutions would be forced to close. The result, he said, is that "the FDIC is broke, dead as a doornail, just like FSLIC would be."
No one really knows exactly what would happen if either fund were to fail. Though policy-makers universally assume that Congress would come to the rescue, it has no legal obligation to do so.
Contrary to widespread belief, no law places the credit of the U.S. Treasury behind the funds. A resolution adopted by Congress in 1982, as the thrift industry was in the midst of turmoil caused by high interest rates, affirmed that insured savings are backed by the "full faith and credit of the United States." The resolution expired at the end of that session of Congress, however.
This year, about 120 banks have closed their doors, the highest total since the depths of the banking crisis of the 1930s. Most have been small agricultural banks in the Midwest.
In California, 10 savings and loans with assets exceeding a total of $12 billion have been taken over by federal regulators since April, largely because of imprudent real estate development and construction lending. However, the S&Ls remain open for business today largely because the FSLIC doesn't have the money or manpower to close them and pay off depositors.
When deposit insurance was established in the mid-1930s, the impact was dramatic. At a time when 10 banks a day were failing, federal guarantees of individual deposits put back into the banking system currency that had been buried in back yards, stuffed into mattresses or hidden in socks.
Achieved Sacred Status
Insured accounts have now achieved such a sacred status in American society that none of the dozens of experts interviewed by The Times believes that Congress would fail to act if either fund went broke.
"It's God, motherhood and country, then comes the savings account," said Ralph Rivet, retired spokesman for Great Western Financial Corp. in Beverly Hills.