70 S&Ls; Shut by Ohio to Stem Depositor Panic
In a bold but controversial bid to stem a banking panic, the governor of Ohio temporarily closed 70 privately insured savings and loan associations Friday, after a deposit run hit several savings institutions in the Cincinnati area.
After stating that “we need to take forceful action,” Gov. Richard F. Celeste told a press conference in Cincinnati that the savings institutions will remain closed until Monday morning. Most would normally have been open Friday and this morning.
It is believed to be the first time since the Depression that a government official has taken such drastic action to dampen a depositor panic.
The action drew sharp protests from some customers and savings and loan officers, who termed it too harsh. At least two S&Ls; were reported to have temporarily defied the closure order but later gave in to the edict.
Celeste’s action was the latest in a sequence of rapidly moving events that began last Saturday after Cincinnati-based Home State Savings Bank failed because of its heavy involvement with a now-defunct government securities dealer in Florida.
Home State Savings’ problems began to surface after a Fort Lauderdale-based securities firm named ESM Government Securities Inc. collapsed last week. It turned out that Home State Savings had lent ESM about $670 million, which was supposedly backed by government securities owned by ESM. However, the Florida company had used the same securities to back other loans, and Home State Savings was unable to get its money back.
It was widely feared that losses from the failure of Home State, which had $1.4 billion in assets, would wipe out the Ohio Deposit Guarantee Fund, a state-regulated private insurance fund that is supposed to protect depositors’ funds should an institution fail.
Fund Feared Inadequate
The run apparently began because depositors were concerned that the $130 million in the private fund was not nearly enough to handle large numbers of withdrawals.
Panic began to spread late in the week as depositors lined up day and night to get their money out of several S&Ls; in the Cincinnati area. “I’ve got my entire savings here,” a nervous customer at one of the troubled institutions told the Associated Press.
Savings and loan officials in California and Washington, D.C., stressed that the problems in Ohio are not industrywide, noting that only 15% of the nation’s S&Ls; are insured by state-sponsored agencies similar to the Ohio Deposit Guarantee Fund.
Deposits at the rest of the nation’s 3,400 savings and loans, including 200 in California, are insured up to $100,000 by the Federal Savings and Loan Insurance Corp., a U.S. government agency.
“We’re not concerned about this spreading to California because the situation is much different,” said a spokesman for the California League of Savings Institutions, a trade group. “The problem is not reflective of general industry conditions.”
‘Viable Institutions’
Celeste told a second press conference in Cleveland later Friday that he wants to restructure the private insurance fund. “It’s a very complicated process,” he said. “Our objective is to be certain we have viable institutions when they reopen.”
Kenneth Cox, director of Ohio’s Department of Commerce, reported that Citicorp, parent of New York’s Citibank, is in active negotiations to acquire Home State Savings. Citicorp has acquired several troubled S&Ls; in other states, including Illinois and California.
In addition, Federal Reserve Board Chairman Paul A. Volcker has pledged to help troubled S&Ls; through any cash crisis.
Although the damage so far appears to be confined to Ohio, the news is certain to worsen the jitters about the nation’s banking system. Two of the nation’s largest banking institutions, Irvine-based Financial Corp. of America and Chicago-based Continental Illinois Corp., survived large deposit runs in 1984 only through massive government assistance.
The problems in Ohio demonstrate how bank customers must cope with a variety of deposit insurance funds at banks, savings and loans and thrifts and loans. Those funds insure savings up to as much as $100,000 per account.
The problems are also certain to raise new questions about the health of the private or state-run deposit insurance programs, which are sometimes promoted as an alternative to relieve the pressure on the government insurance agencies.
California Thrifts
Some states, including California, have state or private insurance programs for thrift and loans, sometimes called industrial banks, which specialize in consumer loans.
In the last 18 months, both Nebraska and California have been jolted by the failure of thrift and loans whose customers later discovered that their accounts did not have adequate insurance backing from private or state-backed agencies.
Savings accounts at California’s 67 thrift and loans are insured by the Thrift Guaranty Corp. of California, a private agency overseen by the state Department of Corporations. Depositors at Western Community MoneyCenter, a thrift and loan in the San Francisco Bay Area that failed last spring, have still received only partial payment on their accounts while the institution is being liquidated.
In Nebraska, the effects are still being felt from the Nov. 1, 1983, failure of Commonwealth Savings Co., a thrift and loan in Lincoln. Although depositors thought their funds were insured up to $30,000, they later discovered that the resources of a private insurance fund were woefully insufficient to cover their $69.5 million in deposits.
Official Fined
Earlier this month, Nebraska’s former attorney general was sentenced to three years’ probation and fined $25,000 for lying before a state legislative committee investigating the collapse of Commonwealth Savings.
The United States has not had a widespread bank panic since the early 1930s, when the Depression caused the failure of more than 10,000 financial institutions. Those failures led President Franklin D. Roosevelt to declare a four-day bank holiday in 1933 and ultimately led to the formation of the Federal Deposit Insurance Corp.
