Banking Needs Closer Scrutiny by Examiners
Confidence in the nation’s banking system has been badly shaken by imprudent lending practices at many banks and savings and loans, some of which have failed in the aftermath.
It raises a rather basic question: Where were the government examiners while this was going on?
Congress has made some effort to seek an answer and will try again in hearings that resume Monday into the collapse of Beverly Hills Savings & Loan. (See related story on this page.) Evidence already has been presented that tougher auditing might well have headed off some problems.
From the outside, at least, it seems incredible that the examination process failed to halt excesses that led to such debacles as the near failure of Continental Illinois and the web of trouble spun by Penn Square Bank with its mindless lending in the oil fields of the Southwest. Examiners also appear to have been powerless to stop some savings and loans from using broadened lending powers to pour money into schemes they knew too little about.
The simplest explanation for this is that the examination process is ill-equipped to oversee and control the greater lending powers and greater risks of a newly deregulated industry. While executives of financial institutions were rewarding themselves with bigger salaries even as they were taking dangerous risks, the examiners remained low-paid and unlikely to stay long in the profession. Moreover, in an era of deregulation and budget restraint, building up this government force is hardly in vogue.
Fewer Examiners
The U.S. Comptroller of the Currency counts 855 banks requiring special supervision, four times the number in 1980. In that period, the number of examiners has dwindled to 2,112 from 2,414.
There were those who warned that the industry and the country would pay a price for this imbalance. As Anthony Frank, chairman of First Nationwide Savings, one of those institutions that stayed out of serious trouble, has put it, “Deregulation doesn’t mean less supervision. It means you need more.”
Joseph J. Pinola, chairman of First Interstate Bancorp., points to stricter capital requirements that make it more difficult for banks to turn a profit and thus force them to make riskier, higher interest loans. That clearly can complicate the task of the bank examiner.
Evidence from the recent debacles suggests that examiners often did spot problems long before they reached crisis proportions but often failed to act on what they found. One top banker cites a case where a major bank’s own board of directors wasn’t informed for 11 months by federal auditors after they spotted possible improper activities.
The problem involves state government as well as federal, since both are often involved in the oversight process.
In California, one S&L; leader complains that the state severely curtailed its effective loan appraisal operation that had been a check against bad lending activity. He calls the failure of the state to expand its examination force “outrageous.”
More Incentives
Some effort at reform is under way. The Federal Home Loan Bank Board, which oversees federally chartered S&Ls;, has managed to pull its examination staff out of civil service so that its members can be paid more and offered more incentives for strong performance. The basic problem of under-staffing remains, however.
Some bankers contend that in reaction to their shortcomings of the past, examiners have become too tough, sometimes capriciously so, compounding the already severe problems of some institutions. That’s probably a predictable response, but getting tough on yesterday’s problems doesn’t insure against new excesses in the future.
The solutions that are needed include a vastly strengthened examination system that can apply tough standards evenly and a set of clear regulations that are readily enforceable. It is foolish not to provide this fundamental protection.
The likely revelations in this week’s congressional hearings may well shake confidence in the system a bit more, but perhaps they will lead to action.
