S&Ls; Get OK for More Interstate Acquisitions : FHLBB Also Proposes New Rule Requiring Thrifts to Double Net Worth Ratio
Regulatory officials Thursday gave federally chartered savings and loan associations broader powers to expand across state lines.
The Federal Home Loan Bank Board approved a new rule allowing such firms to acquire healthy S&Ls; in other states in exchange for rescuing a failing thrift.
The agency also proposed a new rule that would require thrifts to increase their net worth to 6% from 3% of assets over the next six years. The change has long been advocated by banks, which already must meet the 6% standard, and by policy-makers concerned about low capital levels in the savings and loan industry.
The new capital regulation, if approved by the three-member bank board, would take effect Oct. 1. It would force thrifts to boost their net worth (assets minus liabilities) at a rate of 0.5% a year until they reach the 6% level in 1992.
Serves as a Cushion
Savings institutions could strengthen their capital by issuing stock, retaining earnings or selling debt securities. The effect, over the six-year phase-in period, would be to slow loan growth for consumers and limit dividend payments for investors.
Bank or savings and loan capital serves as a cushion against losses from bad loans and fluctuation of interest rates and is considered a fundamental measure of a financial institution’s soundness.
The rule would for the first time give regulators the power to assess the riskiness of an S&L;’s loans and deposits and adjust capital requirements accordingly. A similar proposal for banks is being weighed by federal banking authorities.
The savings industry has 60 days to submit comments on the proposal.
The interstate acquisition rule, originally proposed late last year, is designed to make federally chartered savings and loans more competitive with state-chartered institutions and to save the troubled Federal Savings and Loan Insurance Corp. millions of dollars by increasing the bids for failing thrifts.
The move also represents a significant step toward unfettered nationwide branching, industry analysts said. “The barriers to geographic expansion are being eroded,” said William S. Eckland of McKenna, Conner & Cuneo, a Los Angeles law firm specializing in financial institutions.
Regional ‘Compacts’ Formed
Under current law, a savings and loan that buys a failing thrift in another state can expand its operations only to that state. Under the new rule, the acquiring institution could branch out to three nearby states if such regional expansion is allowed under state law.
Thus, a Florida-based S&L; that agrees to buy a failing thrift in Texas, for example, may then get the FSLIC’s permission to buy healthy S&Ls; in Oklahoma, New Mexico and Arizona.
Fifteen states are members of regional “compacts” that allow interstate savings and loan branching within specified regions. Several other states are close to approving membership in such compacts. California does not yet belong to a regional group, but some of the state’s largest thrifts--such as Home Savings of America, First Nationwide Savings and Glendale Federal Savings--have expanded across the country by buying failing financial institutions.
“This is not a license to go coast to coast, and it’s not intended to be a harbinger of unlimited expansion,” said Patrick McKelvey, a bank board spokesman. “What it is intended to do is find more cost-effective solutions to problem cases faced by the Federal Savings and Loan Insurance Corp.”
The FSLIC, which insures deposits at most of the nation’s 3,500 thrifts, is under severe strain because its insurance fund is too small to handle the deposits of all problem savings institutions. Rather than closing troubled thrifts and paying off depositors, the FSLIC keeps them open until a buyer can be found.
The new rule will help attract higher bids for failing thrifts by offering broader interstate expansion as an incentive, McKelvey said.
