New Standards Peril 800 S&Ls; : Thrifts: Regulators can close those that don't comply. $50 billion provided for the bailout may fall far short.


Federal regulators said Monday that 800 savings and loan associations--almost one-third of the industry--may fail tough new capital standards to be imposed next month.

Institutions that cannot meet the rules by Dec. 7--possibly including a few larger thrifts in California--will be forbidden to expand financially and will be required to submit detailed business plans for the scrutiny and approval of federal regulators.

The regulators have broad authority to close the institutions that prepare unsatisfactory plans or that fail to live up to them. And that, according to separate testimony Monday, will require a further infusion of taxpayer funds on top of the $50 billion that Congress approved in the S&L; bailout law it enacted in August.

The announcement marked the first time federal regulators have estimated a specific number of thrifts that may not meet the guidelines. Regulators in the past had said they expected that several hundred thrifts would flunk, but never placed the number as high as 800.

The 800 institutions that may fall short of meeting the new standards need to raise a staggering $20 billion in additional capital to come into compliance, John Robinson, deputy director of the federal Office of Thrift Supervision, told a news conference. He based this figure on the most recent available audits of federally insured S&Ls.;

M. Danny Wall, director of the Office of Thrift Supervision, told the news conference that some of the 800 institutions have already sold assets to raise funds they need to meet the standards. Wall said it is unclear how many will fail the test as of Dec. 7.

Brian P. Smith, senior vice president of regulatory affairs for the U.S. League of Savings Institutions, estimated that 300 of the 800 thrifts not in compliance with the new standards are in serious trouble and will have to be disposed of by the Resolution Trust Corp., the agency dismantling crippled institutions and selling their assets.

Another 200 of the thrifts will probably meet the standards easily, Smith said during the U.S. League's annual convention in Chicago. Many of them have been shrinking by selling assets since Congress enacted the S&L; bailout.

The other 300 institutions fall somewhere in between, Smith said, and may or may not be able to work their way into compliance with the standards.

S&L; executives at the U.S. League's convention said the capital standards as written by the Office of Thrift Supervision contained no surprises. "This regulation was sort of telegraphed by the legislation," Smith said.

Wall said the new standards "will require savings institutions to become stronger and will thereby reduce the exposure of the federal deposit insurance fund to losses. This was a central theme of President Bush's thrift recovery plan."

The standards will become tougher during the next six years. S&Ls; able to meet the capital requirement that takes effect Dec. 7 may fall short of future standards.

Disposing of the hundreds of thrifts that cannot be revived with additional capital will be a costly and delicate process. Paying off their depositors, whose accounts are insured by the federal government up to $100,000, will take many billions of dollars beyond the $50 billion voted by Congress in August to clean up the S&L; crisis.

Federal officials disclosed last week that, in addition to the $50 billion already voted by Congress, they may need to borrow $50 billion to $100 billion in working capital to close troubled S&Ls; and make good on federal deposit insurance.

The initial $50 billion will be exhausted by the end of next year just to dispose of the 257 institutions now under government control, Daniel P. Kearney, president of the Oversight Board of the Resolution Trust Corp., told a congressional hearing Monday.

"There will be a reluctance, if not inability, of Congress to provide the additional funds," Rep. Kweisi Mfume (D-Md.), a member of a special House Banking Committee task force, warned Kearney.

Congress finds it "mind-boggling" that the regulators want to spend billions more than the $50 billion, said Rep. Thomas McMillen (D-Md.), another task force member.

Federal regulators have said the S&L; bailout legislation gives them the authority to borrow additional funds, as long as they borrow against the value of the real estate and other assets from S&Ls; they intend to seize.

But the General Accounting Office, the investigative arm of Congress, urged the Banking Committee task force to disallow such loans because they would entail higher borrowing costs than direct additional appropriations voted separately by Congress.

"We don't think this . . . is the way to go," Richard L. Fogel, assistant comptroller general, told the task force. Borrowing through the issuance of special new securities backed by the seized assets would increase the cost of the S&L; rescue to taxpayers and would be a "further violation of the integrity of the budget process," he said.

The new capital standards, issued Monday by the Office of Thrift Supervision, require S&Ls; as of Dec. 7 to hold capital equal to 3% of their outstanding loans. Half the sum can be in the form of "goodwill," the intangible value of an S&L; over and above its holdings of cash and securities. Starting in 1992, the S&Ls; must begin replacing their goodwill with cash, and in 1995, only cash will count.

At present, S&Ls; must have capital equal to 3.6% of their liabilities, which are the total savings deposits by their customers plus any borrowings by the institutions. The new standards apply to assets--loans and investments made by the institutions.

As of June 30, 58 thrifts in California did not meet the capital rules, according to Sheshunoff Information Services in Austin, Tex.

Most are relatively small institutions. Some have been closed or sold, such as Pacific Savings Bank in Costa Mesa, or are expected to be sold soon, such as Gibraltar Savings in Simi Valley.

Others have been selling assets or pursuing other financial adjustments but still may have trouble initially meeting the new guidelines, analysts say. Larger thrifts in California expected to have initial difficulties include Valley Federal Savings of Van Nuys, Imperial Corp. of America, parent of Imperial Savings, in San Diego, Financial Corp. of Santa Barbara, Mercury Savings in Huntington Beach and Homestead Savings in San Francisco.

In a separate development, James Barth, chief economist with the Office of Thrift Supervision, said preliminary estimates show that thrifts lost $2.5 billion in the third quarter, contrasted with $1.8 billion in the same quarter a year ago.

Robert A. Rosenblatt reported from Washington and James Bates from Chicago.

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