Volcker Urges Quick Action on New Bank Rules : Legislation Would Ease Way for Failing Banks to Find Out-of-State Buyers

Federal Reserve Board Chairman Paul A. Volcker urged Congress on Wednesday to act quickly on legislation that would make it easier for failing banks to find buyers from other states.

Citing continuing problems among smaller banks in the nation’s troubled Farm Belt and oil-producing areas, Volcker urged an often-skeptical House Banking subcommittee on financial institutions “to act very promptly” and to treat the proposed amendments “as emergency legislation and pass it.”

However, Volcker assured the subcommittee, “I don’t expect the legislation to be used very much.” The panel’s chairman, Rep. Fernand J. St Germain (D-R.I.), and many other subcommittee Democrats expressed fears that large banks would use the proposal to expand further into regional banking systems.

Presented Early in April

“The powers sought are precautionary,” Volcker said. “Perhaps they will, in the end, not have to be used at all. . . . But we need it for a limited number of cases, which, if not handled expeditiously, could be disturbing to the confidence and stability of a number of other, larger institutions.”

The proposed legislation was presented to the subcommittee by Volcker and other federal banking regulators early last month. In making changes in existing regulation of interstate bank mergers, the legislation would:

- Allow out-of-state banks to acquire failing banks with assets of $250 million or more. Current bank emergency regulations allow interstate rescue mergers only if the troubled bank has assets of $500 million or more. Volcker said there are about 440 banks nationwide that fall into the $250-million to $500-million category, many of them in the troubled agriculture and energy sectors and not “salable within a state.”

- Permit an out-of-state bank to buy an entire bank holding company when at least one-third of its units are in trouble or buy a sizable part of a holding company in that condition. Current regulations allow only unit-by-unit acquisitions by out-of-state bank rescuers.

- Allow out-of-state rescues of banks still functioning but in serious danger of closing, rather than just of banks that have already failed, as under current law.

Local Authorities Must Initiate

Under the proposed new rules, the process of finding an out-of-state buyer would have to be initiated by local authorities, who could effectively veto any pending out-of-state merger by coming up with an in-state rescuer--provided only that the Federal Reserve Board approves the financial status of the acquirer. In cases where the failing bank is receiving federal aid, an in-state rescue could be overruled in favor of an out-of-state merger only by unanimous vote of the board of the Federal Deposit Insurance Corp.

Summing up his position, Volcker said the Federal Reserve and the other federal bank overseers--the FDIC and the Comptroller of the Currency--agree that existing emergency tools to deal with failing banks are inadequate. But Volcker stressed his belief that the banking system as a whole, in recent years beset by international debt scares and persistent declines in Farm Belt and energy states, “is now gaining strength” and stability.

However, he warned, it is important to move quickly to rescue failing banks in the troubled areas to avoid a larger threat to banking confidence and stability in those areas.