181 Banks and Thrifts Failed in ’92 : Insolvencies: That’s the bad news. The good news is, that’s the lowest total in seven years.
The combined total of bank and savings association failures dropped to a seven-year low in 1992, but analysts aren’t sure if the worst is over for the nation’s deposit-taking institutions, especially in recession-weary California.
Regulators said there were 181 failures last year, 122 banks and 59 S&Ls.; That’s down from 295 in 1991 and less than half the number during the post-Depression peak year of 1989 when 535 financial institutions were declared insolvent.
Last year marked the third consecutive decline in failures and was the best for the industries, in terms of failures and profits, since 1985 when 151 banks and S&Ls; closed.
“What people don’t realize is that the federal government is much further along in dealing with failed financial institutions than is widely realized,” said analyst Bert Ely, a consultant to the Assn. of Bank Holding Companies.
“With the banks, a lot of the remaining problems were cleared up in 1992,” he said.
The biggest failure of any type of institution in 1992 came on July 10, with the seizure of San Diego-based Homefed Bank and its $13.6 billion in assets. Homefed’s demise came after two years of losses totaling $1.05 billion stemming from bad commercial real estate loans.
Some private analysts are still pessimistic about the outlook. They look at 1992 as the eye of a financial hurricane rather than the end of the storm that soaked financial institutions through the mid- and late-1980s.
“We’re in the middle of a decline, and it’s going to get worse. . . . What we’re experiencing now . . . is an unusual circumstance that is allowing banks to report temporary and perhaps illusory profits,” San Francisco economist and writer R. Dan Brumbaugh said.
Brumbaugh and others analysts point out that much of the record profits--$24.1 billion for banks during the first nine months of 1992 and $4.05 billion for S&Ls--is; being driven by the unusually wide gap between short-term and long-term interest rates.
That means financial institutions can pay the lowest rates since the Depression on their deposits and other liabilities and earn, on average, 4.5 percentage points more on their loans, securities and other investments.
“If interest rates were to narrow unexpectedly next year, say by three percentage points, the profitability being reported by banks would decline to very low levels overnight,” Brumbaugh said.
He declined to make a prediction for failures in 1993 but said that in the long run, unless Congress restructures the financial system, banks and S&Ls; will continue to lose ground to less-regulated competitors in the insurance and securities industries.
The Office of Thrift Supervision says that 19 S&Ls; with $27 billion in assets are almost sure to fail, and others may as well.
Analyst Ely predicted that banks holding $20 billion to $30 billion in assets will fail next year, while the Federal Deposit Insurance Corp. is forecasting the failure of 100 to 125 banks with $76 billion in assets.
But Edward W. Hill, a professor at Cleveland State University, disputed even the FDIC’s more pessimistic forecast. Although healthy banks should “sail smoothly and happily on” after the gap between short-term and long-term interest rates narrows, weak banks will not, Hill said.
He said many weak banks that would have failed this year under less-favorable interest-rate conditions still suffer from sour commercial real estate loans.
And, although commercial real estate markets across much of the nation have stabilized, Southern California is still hurting. That region may be the next banking trouble spot, succeeding New England a few years ago and Texas before that, Hill said.
Setbacks for California’s Banks While the health of the nation’s 11,590 banks was stronger than many observers expected as 1992 ended, recession-racked California’s 460 banks remained sickly overall. Banking growth has Stalled. . . The assets of California banks shrank last year as they socked away money in reserves and shored up capital, their last cushion against losses. Assets (Billions of Dollars) 1987: $281 1988: $299 1989: $324 1990: $345 1991: $353 1992*: $336 . . .and profits have sunk. . . Earnings at the state’s banks hit a peak in 1989 and then plunged in 1991. Higher net income in 1992 is deceptive because the total doesn’t include Security Pacific Corp., which lost $775 million in 1991 and merged into Bank of America last April. Net Income (Millions of Dollars) 1987: $-547 1988: $2,733 1989: $3,756 1990: $3,378 1991: $651 1992*: $878 . . . while bad loans continue to rise. More borrowers are falling behind on loan payments. Regulators don’t want bad loans to exceed 3% of a bank’s total. 1987: 4/41% 1988: 3.15% 1989: 2.78% 1990: 2.79% 1991: 4.56% 1992*: 4.93% * Figures are for first six months Source: The Secura Group, Pasadena
