S&L; Conversions to Banks Could Strain Bailout Fund
Federal regulators are beginning to approve the conversions of savings and loans into banks, actions that could cripple the already troubled S&L; insurance fund and cause a new taxpayer bailout costing billions of dollars.
The threat to taxpayers could be a boon to consumers, however, because the S&Ls; in question--including many giant California-based thrifts--would offer higher interest rates to woo deposits into their newly formed banks.
Chatsworth-based Great Western Financial Corp., parent of the nation’s second-largest S&L;, is expected to win approval today to create two new national banks, federal officials said Thursday. A Minnesota thrift received approval last week to open national banks in four states, and many more S&Ls; are likely to seek status as banks.
Great Western’s new banks, with headquarters in Beverly Hills and Lake Worth, Fla., could be the prototypes for an S&L; industry rapidly converting to full service financial institutions. They would add the business and consumer lending powers of banks to their traditional role as home mortgage lenders.
Great Western and the other thrifts are driven by a stark financial imperative. Banks, with a far stronger insurance fund, pay just $2,000 a year for the federal guarantee protecting deposits up to $100,000. But the thrifts, by contrast, pay 23 cents for every $100 in deposits.
This means Great Western pays $70 million a year for the same deposit insurance that costs Bank of America $2,000.
Premiums for the S&L; insurance fund are far higher because the fund must still foot the bill for continuing costs of the massive thrift bailouts of the 1980s.
Even with the high premium costs, executives at some S&Ls; are still reluctant to make a move.
Downey Savings & Loan in Newport Beach, the state’s eighth-largest thrift and one of seven S&Ls; based in Orange County, will wait to see if Congress merges the two insurance funds this year. Western Financial Savings Bank in Irvine, the 11th-largest, likes the thrift charter and will continue to pay the deposit premium for now.
The ultimate danger of an exodus of S&Ls; is a crippling of the insurance fund, and the inability of the remaining S&Ls; to pay interest on special bonds issued for the S&L; cleanup. This could lead to another costly taxpayer bailout.
As more thrift deposits become bank deposits, there will be a shrinking of the thrift industry’s ability to pay the $1.5-billion-a-year federal insurance bill, which includes $793 million in interest payments for those special bonds.
The exposure for taxpayers could be more than $27 billion--the interest costs of the special bonds for the next 30 years--as well as the expense of any individual thrift failures.
Such a prospect is expected to prompt Congress to force banks to foot part of the bill for the S&L; cleanup.
The House Banking Committee voted Thursday for a complex plan that would provide an infusion of cash from the thrift industry for the ailing S&L; fund, require banks to make contributions and eventually create a single insurance fund for all banks and thrifts.
But it is uncertain whether House Republican leaders can work out a version with their Senate counterparts that would pass Congress before the legislators adjourn for the election campaigns.
Meanwhile, the approval of bank charters for a huge S&L; such as Great Western, with Irwindale-based Home Savings of America and Los Angeles-based California Federal Bank waiting in the wings, dramatically illustrates how the leakage of thrift deposits could become a flood.
Cal Fed, the nation’s 10th-largest thrift, has an application pending with the office of the comptroller of the currency to open a national bank in Los Angeles. Home Savings, the largest thrift, has applied for a state charter in Washington. The comptroller regulates national banks.
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“We’ve been trying to become more bank-like for a long time,” James F. Montgomery, chairman of Great Western, said Thursday.
“It’s too bad we have to do it this way, rather than the right way” through a merger of the insurance funds and the charters for the separate financial institutions, he said. “Eventually, there will be a single banking industry in this country.”
What Great Western has done is “a pretty costly process,” but it may be the route thrifts have to take if Congress does not merge the bank and thrift insurance funds, said Stephen W. Prough, Downey’s president.
“Congress is creating a big problem by its inaction,” Prough said. “The sooner they take action, the more money Congress makes for the government.”
Great Western will essentially leave the thrift fund without paying any fees. Most thrifts were willing a year ago to pay millions of dollars to move into the bank fund, Prough said. But Congress has failed to act.
The thrift charter still carries unique characteristics that appeal to some S&Ls; like Western Financial. While S&Ls; specialize in home mortgage lending, they also can sell insurance, invest in real estate and operate in other business ventures.
“And there’s a lot of things that banks do that we can or soon will be able to do--like commercial loans,” said Don Kasle, Western Financial’s president.
Banks’ powers are concentrated in consumer and business lending, areas that big S&Ls; like Great Western are moving into. So changing to a bank charter is beneficial.
“We hope this will be a wake-up call to Congress,” said Montgomery, who is also chairman of America’s Community Bankers, an S&L; trade group.
Nearly $100 billion of the S&L; industry’s $700 billion in deposits is held by institutions that have applied to the comptroller for permission to operate banks.
Only customers, rather than S&L; management, can shift deposits to the new banks. Thus, S&Ls; seeking to move money are expected to mount special marketing campaigns, offering certificates of deposit and other accounts at above-market interest rates.
For current customers whose CDs mature, the S&Ls; would offer to pay a higher rate at the bank for renewing the CD than would be available at the thrift. The customer would merely have to sign a paper, opening a new account at the bank.
Great Western still needs approval from the Federal Deposit Insurance Corp. and the Federal Reserve Board for permission to run banks with full commercial and consumer lending powers, and to operate a holding company for the bank units. Its banks would not require new buildings but would operate in existing Great Western offices.
The comptroller approved the first application to switch earlier this month, giving TCF Financial Corp. of Minneapolis the right to open national banks in Minnesota, Michigan, Wisconsin and Illinois. This signaled the “bursting of the dam” as S&Ls; rush to move their money away from exposure to the high-cost insurance fund, said Paul A. Schosberg, president of America’s Community Bankers.
“Congress has just not been able to keep up with reality,” said Edward C. Furash, managing partner of Furash & Co., a financial consulting firm in Washington.
“The reality is the thrifts have to make major choices in the next two or three years about shifting to become major commercial banks, or contracting themselves,” he said.
Also contributing to this report was Times staff writer James S. Granelli in Orange County.
