Fatal Loans to Sister Bank Reported : Finance: Connecticut Bank & Trust Co. tried to revive the ailing Bank of New England, a House committee says, and they eventually both failed.
The tottering Bank of New England in Boston turned to its sister bank, Connecticut Bank & Trust Co. in Hartford, for billions in emergency loans in late 1989, according to a House Banking Committee report.
The newly released report details the events that brought down both the Boston and Hartford banks and their parent company, Bank of New England Corp. last January.
It portrays the Bank of New England, flagship of the bank holding company, as starving for cash as the real estate economy plummeted in the fall of 1989. And it shows the better-regarded Connecticut Bank & Trust propping up BNE to its own detriment.
In a process common in the world of banking but here charged with the urgency of an institution on the brink of failure, the Connecticut bank went to the “overnight fund” market for cash. Working through the Federal Reserve, CBT took out one-day loans from other banks and, in turn, lent those funds to Bank of New England. As one day’s loan was paid back, another would be taken out.
Initially, in October and November of 1989, CBT was borrowing $700 million a night and then lending that money to Bank of New England.
“By December, 1989 the average was up to $1 billion a night, and by January, $1.4 billion a night,” the report says.
An internal Federal Reserve examination, detailed in the Banking Committee’s report, indicated that Bank of New England’s declining reputation forced it to seek funds through CBT. Most of the negative publicity focused on Bank of New England. The name Connecticut Bank & Trust still carried some credibility in the financial markets, the federal regulators reported.
Bank of New England’s bad image was rapidly spreading to CBT. Banks that had refused to lend money to Bank of New England began to turn a cold shoulder to CBT.
When the end came, CBT’s loans to its sister bank proved suicidal.
“BNE’s inability to repay these funds was the grounds eventually used by federal regulators in January, 1991, to close CBT,” the House report says.
Banking experts offered varying interpretations of CBT’s role in the final days of Bank of New England.
The practice of one bank borrowing from a sister bank within the same company is “totally fair game,” according to David Berry, banking analyst with Keefe Bruyette & Woods in New York.
“To the extent that the Massachusetts bank used the Connecticut bank to address their liquidity crisis, I say more power to them,” Berry said. “It’s why you have separate banks.”
Berry said the House report was somewhat misleading. From the Connecticut point of view, he said, “It sounds like Bank of New England was a sinking ship and they reached out and unfairly sank your bank too.”
Christopher Mahoney of Moody’s Investors Service said the problem throughout the bank was not emergency lending but a slew of bad real estate loans. In any case, Mahoney said, by late 1989, with federal regulators in the bank every day, these actions would certainly have been reviewed and approved.
The FDIC would still have seized Connecticut Bank & Trust even if it had remained solvent and lent nothing to Bank of New England, said Lee Cross, spokeswoman for the Office of the Comptroller of the Currency, the top federal banking regulatory agency. The 1989 savings and loan bailout law allows the government to seize profitable subsidiaries if a sister bank fails.
