Regulators Cite Need to Rescue Ailing Lenders : Softer Bank Merger Rules Urged

Faced with 1,200 banks in financial trouble, the nation’s regulators urged Congress on Wednesday to approve legislation that would make it easier for banks to merge across state lines to rescue ailing institutions.

But a skeptical Rep. Fernand J. St Germain (D-R.I.), chairman of the House Banking Committee, warned the regulators at a hearing that “you will have a lot of convincing to do.” St Germain and other committee members fear that new legislative powers could break down the remaining barriers to interstate banking and give a handful of big banks a chance to become even larger.

The federal legislation providing for bank rescues expires next week. Congress seems likely to approve a brief extension and then debate whether to make it easier to cross state lines in bank purchases.

Under current law, an out-of-state rescue is allowed only when a bank has assets of at least $500 million and has already failed. Federal financial regulators are seeking authority to arrange deals for banks with assets of $250 million or more and to allow mergers when banks are in financial difficulty but have not necessarily failed.

Need to Limit Damage Cited

It is “vital” that banking authorities have the ability to deal quickly with an ailing institution to limit the damage to “local communities or regions and to avoid repercussions on the banking system generally,” the regulators said in a letter to St Germain. It was signed by Robert L. Clarke, comptroller of the currency; L. William Seidman, chairman of the Federal Deposit Insurance Corp., and Paul A. Volcker, chairman of the Federal Reserve Board.

When a federally insured bank fails and shuts down, the federal insurance fund pays off depositors’ accounts up to $100,000 each. By waiting until a bank fails before finding another institution to take over the business, the FDIC is forced to spend more of its insurance fund, the regulators said. And local business communities can be hurt by bank shutdowns.

Instead, the regulators said, they want to “authorize the bank management and the regulators to act if a bank is clearly in danger of closing.”

More than 1,200 of the nation’s 14,000 commercial banks are on the government’s list of troubled institutions requiring close regulatory attention, Seidman told the Banking Committee. The number of troubled banks could increase if oil prices remain depressed for six months or more, he said.

A more optimistic view was offered by Preston Martin, vice chairman of the Federal Reserve Board, who said the nation’s banking system is fundamentally sound and “shows some robust signs” despite the weakness of some banks heavily involved in lending to farmers, oil producers and developing countries. He said the industry’s basic health was demonstrated by a 17% rise in earnings last year.

However, Comptroller Clarke warned that commercial banking is becoming less profitable and said that banks should be allowed to seek additional earnings by entering new lines of business.