Ailing S&Ls; Paying High Rates to Attract Deposits

About 40 troubled savings and loans under the direct control of the U.S. government are paying extraordinarily high interest rates to lure new depositors--a practice the banking community and federal regulators have criticized as too risky.

The Federal Home Loan Bank Board, the federal regulator of S&Ls;, for years has criticized troubled savings and loan institutions for paying higher-than-usual interest rates. But in a letter released this week from bank board Chairman Edwin J. Gray to the House Banking Committee, the bank board disclosed it has become one of the biggest abusers of the risky practice.

Since early 1985, the bank board has been forced to take over and manage dozens of financially troubled S&Ls; because the federal fund that insures deposits at S&Ls; does not have enough money to close them and pay off depositors.

Gray’s confidential letter, delivered last week to the banking committee, revealed that the institutions that the bank board now operates “are among the very highest rate payers for funds in order to maintain their deposit bases.”

“As a result of these high-cost deposits,” Gray said, “such institutions continue to experience large and worsening operating losses,” adding billions of dollars to the eventual cost of shutting them.

A recent board study also found that, last year alone, higher-than-normal rates offered by sick S&Ls; added from $3 billion to $4 billion to the expenses of healthy S&Ls;, which must raise their rates to compete. Financially ailing S&Ls; lure deposits to meet day-to-day cash needs or because they hope to make investments that will make up for past losses.

The funds the S&Ls; attract often are deposited in chunks of $100,000 to guarantee the money is insured by the Federal Savings and Loan Insurance Corp., the division of the bank board that guarantees deposits up to $100,000.