NEWS ANALYSIS : More Big Bank Failures Are Said to Be Unlikely : Banking: Few institutions are in the kind of deep-seated financial trouble that the Bank of New England was in, industry officials say.
The failure of Bank of New England--one of the largest bank failures in U.S. history--is sure to exacerbate worries about the health and safety of the nation’s banking system, which is already battered by a souring economy, sliding real estate prices and over-indebted corporate borrowers.
However, economists and industry insiders believe that few big banks are as troubled as the $22-billion-in-assets Bankof New England, which was taken over by regulators late Sunday.
“I don’t think this is a forbearer of multiple numbers of bank failures,” said Paul Hazen, president of Wells Fargo Bank in San Francisco. “I hope and believe that this is an extreme case.”
Bank of New England’s troubles were caused largely by an aggressive expansion plan that had the bank snapping up 20 other banks in quick succession and competing fiercely for loans. Unfortunately,
Bank of New England’s “lending binge”--as the company’s competitors termed it-- started when the Massachusetts real estate market was already overheated. When real estate prices began to fall, Bank of New England took it on the chin.
The bank, which once ranked as the nation’s 18th largest, posted a $1.1-billion loss in 1989, and it announced a few days ago that it would post another $450-million loss during the fourth quarter of 1990, rendering it insolvent.
Although other banks are also suffering loan problems and losses, most big banks continue to have sufficient equity to handle the losses--at least for the short term, industry experts said.
“Most of the other big banks that I know of are not only solvent, but doing quite well,” said Irwin Kellner, chief economist with Manufacturers Hanover in New York.
There are other exceptionally troubled institutions out there, added another banking expert who asked not to be identified. However, few are as large or well-known as the Bank of New England group, which includes Connecticut Bank and Trust and Maine National Bank, the expert said.
Nevertheless, continued weakness in the economy could further erode the health of the nation’s banks. Those that have great exposure to real estate loans in the Northeast and in some parts of California are already suffering depressed earnings. Industry experts believe that some smaller banks will fail because of the economic and real estate problems that have already devastated some regions, and continue to spread like a cancer.
Indeed, L. William Seidman, chairman of the Federal Deposit Insurance Corp., has said that about 1,000 banks are on the FDIC’s danger list. That’s significantly fewer than the 1,500 that made the danger list a year ago--but still troubling, considering that the number represents nearly 10% of the nation’s banks.
As the U.S. slides into its first recession in more than eight years, non-bank pockets of trouble are surfacing too.
That is worrisome to bankers, who have long lived by the adage that banks are only as healthy as the customers they serve.
Regulatory policies are currently forcing banks to be more careful about the loans that they make. Although that is a wise long-term policy, in the short-run it can worsen the pinch on some borrowers and banks, Kellner said.
Regulators are now forcing what’s called “anticipatory reserves,” a high-brow term for money set aside for loans that may or may not sour in the future. These reserves “could push more banks closer to the edge,” Kellner said.
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