Banking Fund 'Precarious,' GAO Chief Says : Banking: Congress is told that the Federal Deposit Insurance Corp. may not be able to handle a large failure without new borrowing authority.

Banking Fund ‘Precarious,’ GAO Chief Says : Banking: Congress is told that the Federal Deposit Insurance Corp. may not be able to handle a large failure without new borrowing authority.

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April 27, 1991 12 AM PT

From Associated Press

WASHINGTON —

Congress’ chief auditor said Friday that the fund protecting the nation’s bank deposits has shrunk so severely that it may be unable to handle a large bank failure without additional authority to borrow from the Treasury.

Charles A. Bowsher, head of the General Accounting Office, told the Senate Banking Committee that the Federal Deposit Insurance Corp.’s fund will be broke by next year unless it is quickly and massively replenished.

He suggested that banks pay an extra $15 billion into the fund this year, an amount nearly equal to the industry’s profit in 1990. He urged Congress to act before it recesses in August.

“One thing is clear--the fund is in a precarious state,” Bowsher said. “I cannot overemphasize the importance we place on rebuilding it as soon as possible.”

FDIC Chairman L. William Seidman, in a telephone interview, agreed that the fund was weak, but he said it could handle a large failure.

The GAO is disputing the FDIC’s bookkeeping, which showed $8.4 billion in the fund at the end of last year. Bowsher said the net worth was “no higher than $5 billion” and possibly as little as $3.4 billion.

He said the focus of the dispute was about when to deduct the estimated cost of probable failures from the fund’s net worth. The issue is important because it affects the FDIC’s ability to borrow temporarily from the Treasury, he said. The FDIC is limited to borrowing nine times its net worth to cover the assets in a failed bank.

In the case of Bank of New England, the third-largest bank failure to date, the FDIC is borrowing about $5 billion from the Treasury until it can sell the bank’s bad loans and repossessed real estate. It estimates the ultimate cost at $2.5 billion.

A lower net worth would make it difficult for the FDIC to handle another large bank failure until Congress authorizes more borrowing, Bowsher said. But Seidman said that even if the GAO is correct about the fund’s net worth, “we can certainly handle another as big as Bank of New England.”