FHLBB Acts to Rein in Fast Growth and Risky Investments by S

The Federal Home Loan Bank Board, worried about the health of the insurance fund that protects savings and loan deposits, approved tough new regulations Thursday to discourage rapid growth and risky investments by savings and loan associations.

The new rules were adopted unanimously despite an appeal from 78 members of Congress, who argued that the entire industry is being “punished for the misdeeds of a few,” according to a letter to the board from Rep. Frank Annunzio (D-Ill.), chairman of the House Banking Committee’s consumer affairs subcommittee.

But board Chairman Edwin J. Gray, in an interview after the regulations were adopted, said: “We are the operators of an insurance company and it is important that we pay close attention to . . . the risk.”

The Federal Savings and Loan Insurance Corp. fund, which guarantees deposits of up to $100,000, contains about $6 billion to safeguard $800 billion in deposits.

Speculative Ventures

But federal regulators are increasingly fearful that some savings and loan associations may collapse after making dangerously speculative ventures outside their traditional business of providing home mortgages. For example, the failures of just two institutions--San Marino Savings & Loan of California and Empire Savings & Loan of Mesquite, Tex.--are expected to cost the FSLIC more than $400 million.

California, Texas and several other states have given savings and loan associations broad authority to make new types of investments. But the bank board moved to rein in these powers Thursday, declaring that savings and loan associations covered by federal insurance must get advance approval before making any investments in excess of 10% of their assets.

“I suspect growth will be slower for some institutions, but many are not growing excessively,” Gray noted.

The regulations approved Thursday will be published in the Federal Register within the next week and will become effective 30 days later.

Meet Strict Standards

Under the new procedures, savings and loan associations would be required to meet strict standards of net worth, showing an excess of assets over liabilities at the end of each quarter of growth. The net worth could come from retained profits or from the sale of stock or other financial instruments.

According to federal regulators, a savings and loan association must obtain new capital for a solid financial foundation to support its rapid expansion. When an institution expands at an annual rate of up to 15%, it must add to its net worth 3% of the new liabilities, the new rule declares.

Thus, if the deposit growth was $10 million, the net worth must increase by $300,000--3% of $10 million. The ratio increases along with the expansion, reaching 5% for a savings and loan association growing at an annual rate faster than 25%.

Accompanying the revised net-worth standard Thursday was the strict decree requiring advance approval for new investments in excess of 10% of assets.

“Too many dollars are chasing too few good assets,” said William J. Schilling, director of the bank board’s office of examinations and supervisions. Schilling told the crowded board meeting that regulators are concerned because some savings and loan managers are moving away from their traditional role as providers of home mortgages, using newly won deposits to invest in such unfamiliar ventures as oil and gas exploration, financing of boxing matches, running restaurant chains and selling parts for antique aircraft.

“We have reviewed case after case of institutions in trouble, books in a shambles, because of growth run amok,” he said.

The savings and loan industry reacted with cautious acceptance of the regulations. A “substantial majority understand we must work to protect the insurance fund at all costs,” said William B. O’Connell, president of the U.S. League of Savings Institutions. “Some direct investments posed some serious problems.”

Stirring Controversy

He added: “We are pleased the bank board has made several major modifications in the original proposals. We worked the thing out in good shape.”

However, the new rules are stirring controversy in Congress. While some associations have “abused” the power to make new investments, “little evidence exists to show that such abuses have occurred across the board,” Annunzio said in his letter. “Why then should an entire industry, which is just beginning to regain its financial health, be punished for the misdeeds of a few?”

In other action Thursday, the bank board extended until Aug. 1 its rule requiring advance approval for acquisitions of more than 10% of the shares of converted savings institutions. This rule applies to savings and loan associations that switched from mutual ownership by depositors to stock ownership.