S&Ls; Will Need More Insurance Help: GAO
The General Accounting Office today urged quick action to help the country’s weakened thrifts and top members of the Senate Banking Committee pledged to stand behind the banking group.
If Congress decides it must strengthen the Federal Savings and Loan Insurance Corp., it should do so swiftly, a senior official of the congressional oversight agency said in testimony before the Senate Banking Committee.
The FSLIC guarantees deposits at U.S. thrifts, which have traditionally specialized in mortgage lending but also offer other loans and banking services to consumers.
“Any delays in acting on insolvent thrifts inevitably result in increased resolution costs and undermine the stability of all financial institutions,” Frederick Wolf told the Senate Banking Committee.
William Proxmire, the chairman of the Senate Banking Committee, said at the hearing that Congress would continue to stand behind the thrift industry.
“No matter what the condition of the industry, there is absolutely no doubt the U.S. Congress stands behind the savings and loan industry,” Proxmire said.
“There is absolutely no doubt deposits in savings associations are safe,” Proxmire added, noting that FSLIC insures deposits up to $100,000.
Proxmire said he was making his statement to prevent any loss of public confidence in the savings and loan industry, and he was backed by the committee’s senior Republican, Jake Garn of Utah.
“Let’s not panic the American people. I don’t minimize the problem, but let’s not exaggerate it,” Garn said.
The GAO said that 507 of the nation’s 3,147 federally insured thrifts were insolvent at the end of the 1987, but Bert Ely, a private consultant, told the banking committee he had identified 849 savings associations as insolvent.
The committee heard testimony from GAO and private financial consultants that FSLIC might need much more money to help insolvent thrifts.
“We conclude that the eventual costs of restoring the thrift industry’s financial health are likely to exceed the funds that FSLIC will have available,” Wolf of the GAO said.
FSLIC expects to have about $28 billion in new funds over the next 10 years, the GAO said. It receives support in the form of contributions from savings and loan institutions, which mainly finance home purchases.
Last year, Congress also authorized FSLIC to borrow $10.8 billion over several years because its resources were low.
FSLIC injects capital into weak institutions and facilitates mergers, which is usually less costly than closing thrifts and paying off depositors.
While FSLIC says its funds are adequate to carry out a plan to merge or liquidate more than 100 thrifts in Texas, the GAO said FSLIC was following relatively optimistic assumptions about interest rates and future economic conditions.
