A study of bank failures from 1979 to 1987 shows that although ailing regional economies had an obvious impact, much of the blame must go to poor managers, Comptroller of the Currency Robert L. Clarke said Wednesday.
"Our findings suggest that banks continue to fail the old-fashioned way: through managerial incompetence," Clarke said in a speech to financial industry officials.
Clarke, who regulates about 4,900 nationally chartered banks, said his office undertook the study to question the assumption that depressed conditions in agriculture, energy production and real estate were largely responsible for a wave of bank failures unprecedented since the early 1930s.
Since 1979, 631 federally insured banks with state or national charters have closed their doors. More than half failures have occurred in the past two years and more than 80% in the past four years.
Bank failures reached a record 184 last year, and the figure is expected to stay high this year because conditions in the oil states are still bad, said L. William Seidman, chairman of the Federal Deposit Insurance Corp.
The comptroller's study examined 162 nationally chartered banks that have gone under since 1979.
Clarke said economic trouble was the sole significant reason for failure of only 7% of the banks and a key factor among several reasons for only 35% of the banks.
But poor management, either by the banks' officers, its directors or both, played a significant role in 89% of the failures, he said.
Banks "continue to fail from the multitude of sins of commission and omission . . . sins that in many cases became deadly when the economic environment worsened," Clarke said.
The study found that insider abuse--the improper granting or administration of loans to bank officers or directors--was present in 36% of the failed banks and played a significant role in the failure of 10%.
Asked whether the comptroller's office should take a stronger hand in bank matters, Clarke said his office removes incompetent managers when appropriate, but he said the proper role of regulators was not to run the nation's banks.
"As federal bank supervisors, we cannot keep banks from failing. We cannot, and should not, as outsiders run banks. That's why bankers were created," he said.
However, he said, "We see problem prevention as part of our mission, not by running banks ourselves, but by helping bankers with our guidance on how to avoid disaster."
Clarke said his office has been hampered in performing this counseling role by difficulty in keeping senior bank examiners, who leave the agency for higher salaries with private companies.
"You can't do that (counseling) nearly as effectively with somebody who is only three or four years out of school as you can with somebody who has been examining banks for 20 years. Unfortunately, we're losing too many of our 20-year veterans," he said.
The comptroller employs about 2,300 examiners, paid salaries ranging from $14,700 for a recent graduate to $72,500 for a senior examiner with supervisory responsibilities, said Lee Cross, a spokeswoman for the comptroller. Annual turnover duritng the 1980s has ranged between 13% and 15%, she said.
WHY BANKS FAIL
The Comptroller of the Currency has completed an eight-year study. Here are some problems discovered and the frequency of their occurrence:
Reason Frequency A passive, uninformed or inexperienced board 60% No policy for making loans or one poorly followed 81% A poor system for identifying bad loans 59% Domination of the bank by a single person 57% Overly aggressive managers seeking growth with too-liberal standards for loans 43% Improper granting of loans to bank officers or directors 10%