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October 15, 1982
SeroSedSerio
legislation could save the Government "hundreds of millions of dollars" in liquidation
costs. He further warned that if the Congress
did not approve the legislation with its strict
gl!idelines for interstate and interindustry
emergency acquisitions, the Fed reluctantly
might have to exercise its authority under the
Bank Holding Company (BHC) Act to permit
the acquisition offailing S&L's by bank hold-'
ing companies in emergency situations.
It has been almost one year since Congress
undertook serious action designed to address
the severe problems confronting depository
institutions. A number of thrift institutions, in
particular, began losing money in 1980, and
their losses accelerated in 1981. In the last
quarter of 1981, regulators began a patchwork of intrastate and interstate emergency·
mergers of failing institutions that has since
been accompanied by a national reassessment of past principles regarding geographic
and industry business boundaries. The reassessment culminated, for the time being, in
the passage of the "Garn-St. Germain Depository Institutions Act of 1982':
When the House bi II moved to the Senate, its
provisions, with some modification, were
incorporated into a much more comprehensive "Financial Institutions Restructuring and
Services Act" submitted by Banking Committee Chairman Jake Garn (R-Utah) and eventually supported by the Administration. The
measure quickly became the object of fierce
debate. Trade groups clashed over various
provisions designed to substantially broaden
the lending, investment and deposit powers
of federally chartered thrift institutions, and to
modify the 1 933 Glass-Steagall Act to permit
banks and thrifts to compete more effectively
with institutions such as money market funds.
Pastwas prologue
About a year ago, the House of Representatives passed HR 4603 by a 371-46 vote. This
was the so-called "Regulators" or "EmergencyTakeover" bill expanding the form and
conditions under which federal regulatory
and insurance agencies could extend
financial assistance to a growing number of
troubled depository institutions. The bill also
provided for the inter-industry (commercial
bank and thrift) and interstate acquisitionof.
failed or failing savings and loans and large
(approximately $2 billion in assets)failed
savings banks.
late, but earnest
However, it was not until almost a year later,
on October 1, that a revised and broader
"Depository Institutions Act of 1 982" finally
cleared both the House and Senate. This
Letter reviews some of the conditions and
concerns that led to its passageand that seem
likely to shape efforts at further reform of
financial market regulation next year.
The bill approved by the Senate this September after bitter inter- and intra-industry
debate represented a vastly modified version
of the original"restructuring" proposal. Even
then, it secured last-minute support from the
American Bankers Association (ABA),
although not the Independent Bankers
Association of America (IBAA), only because
of amendments added on the floor during
final debate which re-incorporated several
(but not all) provisions insisted upon by the
large bankers association.
In the course of the debate on H R 4603 a year
ago Federal Reserve Board Chairman Paul
Volcker stated that."the entire savings and
loan industry was not in jeopardy," but that a
number faced "transitional problems," and,
depending on the course of interest rates, the
The bill HR 6267, the "Depository Institutions Act of 1 982," that was finally approved
by both houses on October 1 includes key
provisions for financial assistance to and for
the emergency acquisition of failed or failing
depository institutions, as well as various pro. 1
in thi') nevvsletter do Ilot
rellect tht' VieV\h of till::' nl Clllagel TlerTt
of the Federal Re Sf'rH' Bank of \:';an Francisco.
or of the Board ()f Cov('rnors oi the Federal
Reserve SvstCIl1.
()pinion'.i
Other forms of assistance
visions authorizing expanded powers for
both commercial banks and thrifts.
Among the other key provisions of HR 6267
are those which would increase the forms of
assistance that the FDIC and FSLlC can
extend to troubled depository institutions and
the conditions under which they can be
extended, including the existence of severe
financial problems in particular areas.
A major catalyst helping to move HR 6267
was the continued decline in the net worth of
the nation's S&L's through August (a drop of
20 percent over the year), and announcements by both the FDIC and the FSLlC that
over the last 18-20 months each had expended almost $2 billion in financial assistance in support of troubled banks and S&L's,
including aid in the mergers of failing or
failed institutions. The FDIC's outlays far surpassed the $350 million total of such outlays
over the past 50 years, while the FSLlC's payments, involving some 74 S&L's with $36
billion in assets,also represented a record.
Moreover, both agencies indicated that they
expect the number of cases requiring assistance to increase.
A related "capital assistance" provision gives
the regulatory agencies authority to bolster
institutions with government backed " Net
Worth Certificates," which can be counted as
additions to net worth. The assistance can
range in amountupto 70 percent of operating
losses, the amount depending in part upon
whether an institution's net worth ranges
from zero to three percent. Also, to qualify for
the assistance, an institution must have at
least 20 percent of its loan portfolio in residential mortgages, and must have incurred
operating losses during the two previous.
quarters. As an institution's earnings and net
worth improve, the promissory notes or certificates are to be paid off. The assistance
program is subject to "sunset" in three years.
With this prospect in mind Congress included
a key provision permitting the FDI C to approve the acquisition of large ($500 million
or more in assets),closed, insured commercial banks as well as of failed mutual savings
banks or failed or failing S&L's. In all cases,
the acquisition can take place only after consultation with state authorities whose objections can be overridden by the unanimous
vote of the insuring agency.
DI De mandate
Yet another-and, according to some bankers, the key-provision of the bill mandates
the DI D C to create, within 60 days, a new
account directly equivalent to and competitive with money funds. The account must
include no interest ceiling and a limitofthree
third party and three preauthorized or automatic transfers a month if it is not to be subject
to System reserve requirements on transactions accou nts. Wh i Ie 01D C is to work out the
detai Is, the House-Senate Conference Report
expressed the view that the minimum of the
account should be no higher than $5,000.
The AB A strongly supports such an account
-which, unlike money market funds, will be
insured-but many small bankers and some
thrifts expressed fear over its potential for
"cannibalizing" their remaining low rate
passbook savings. Related provisions also
mandate the DI D C to forego the imposition of
an interest rate ceiling or rate differential on
any new deposit account, and to eliminate all
Priority in acquisitions permitted by the
agencies is to be accorded to (1) institutions of
the same type in the same state, (2) institutions of the same type in different states, (3)
institutions of different types in the same state,
and finally, (4) institutions of different types
in different states. This order generally was
favored by thrifts, concerned over the prospect of acqu isitions by banks. Bankers, fearfu I
of any weakening of present restrictions on
interstate banking, generally favored according priority to intra-state mergers even when
these involve industry crossovers. However,
in considering interstate offers, the bill gives
priority to bids from entities in adjoining
states. In any case, the acquisition provisions
are subject to "sunset"-expiration
-after
three years.
2
market funds but laments the provisions that
generally prohibit bank holding companies
from offering property and casualty insurance
and the absence of authorization to underwrite municipal revenue bonds.
interest rate differentials between banks and
S&L's by January 1, 1984.
Other key provisions permit S&L's and
mutual savings banks to place an increasing
proportion of their assets in commercial and
agricultural loans, up to a maximum of 10
percent after January 1, 1984, with related
authority to offer demand deposits to persons
having a business relationship.
The Independent Bankers opposed the bill
outright. They object to the extension of
any additional asset and deposit authority
to the thrifts and, wary of takeovers by interstate bankers, do not welcome the inclusion of failed large commercial banks among
the institutions potentially eligible foracquisition by out-of-state banks and bank holding
companies.
The measure also overrides state laws which
permit enforcement of "due on sale" clauses
in outstanding conventional home mortgage
loans. This override means that lenders (state
as well as federally chartered institutions) will
be able to prevent the assumption of mortgage loans that they hold when a house is
sold. The override will not affect transactions
involving assumptions that occurred prior to
the bill's becoming law, but generally will
apply to outstanding as well as to newly
originated loans containing due on sale
clauses. The bill contains an exception for
loans made or assumed during periods when
state laws preventing enforcement of due on
sale clauses were in effect, creating a
three-year "window period" during which
the state laws can remain in force.
For his part, Senator Garn notes that there still
are "large issues that we were not able to
address" but which "have not gone away and
will have to be dealt with fully and openly by
the next Congress."
Just how congressional perspectives on the
remaining "large issues" will be influenced
by the forthcoming electoral festivities remains to be seen, but most assuredly, the
issuesof interstate banking and the continued
viability of the selective restraints of the
McFadden Act (whose branching restrictions
do not apply to thrifts or money marketfunds)
and of the Glass Steagall Act (whose restrictions on the formation of security subsidiaries
apply only to national and state member
banks-not to non-member banks) are certain to remain on the front burner.
Another provision wi II exempt from Fed
reserve requirements the first $2 million of
depository institutions' reservable liabilities.
The exemption will affect an estimated
21,000 credit unions, S&L's and commercial
banks. While these represent about half of all
depository institutions, they account for less
than 2 percent of total deposits and thus do not
materially affectthe System's abilityto implement its monetary policy responsibilities.
California's legislature and the governments
of some other states have recently authorized
interindustry acquisitions by banks and thrifts
and authorized both industries to operate
money market funds. When actions on these
as yet unresolved issues do come at the federallevel, it may well be prompted, as past
actions have been, by market developments
and the actions of state legislators. Consequently, they, too may be "sero sed serio"
-"late but earnest."
Industry reactions
Industry responses to the new bill vary. Thrifts
generally welcome the financial assistance
provisions and broadened lending and deposit authority, although some view the new
deposit instrument and interest rate differential provisions with some misgiving. The AB A
warmly welcomes the provision for a deposit
instrument "truly competitive" with money
Verle Johnston
3
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BANKINGDATA-TWELFTHfEDERAL
RESERVE
DISTRICT
(Dollaramounts.in
millions)
Selected
Assets ndLiabilities
a
Large
Commercial
Banks
Loans
(gross,
adjusted) investments*
and
Loans
(gross,
adjusted) total#
Commercial industrial
and
Real
estate
Loans individuals
to
Securities
loans
U.s.Treasury
securities*
Othersecurities*
Demand
deposits total#
Demand
deposits adjusted
Savings
deposits total
Timedeposits total#
Individuals, & corp.
part.
(Large
negotiable
CD's)
Weekly
Averages
of DailyFigures
MemberBankReserve
Position
Excess
Reserves )/Deficiency- )
(+
(
Borrowings
Netfreereserves )/Netborrowed
(+
(-)
Amount
Outstanding
9/29/82
162,511
142,650
45,812
57,567
23,517
2,652
6,568
13,293
38,473
26,694
30,795
100,653
90,584
38,019
Weekended
Change
from
Change
from
yearago.
Dollar
Percent
9/22/82
-
-
-
427
452
212
5
47
99
25
50
369
760
196
340
215
90
-
9,345
10,435
5,706
2,867
319
1,127
877
1,967
3,910
1,826
1,206
15,318
13,189
4,163
Weekended
9/29/82
9/22/82
88
70
18
81
10
71
-
-
6.1
7.9
14.2
5.2
1.4
73.9
15.4
12.9
9.2
6.4
4.1
18.0
17.0
12.3
Comparable
year-ago
period
222
99
123
* Excludes
trading
account
securities.
# Includes
items shownseparately.
not
Editorial
comments beaddressed the editoror to the author.... Free
may
to
copies thisandotherFederal
of
Reserve
publications beobtained calling writingthePublicInformation
can
by
or
Section,
Federal
Reserve
Bank SanFrancisco, Box7702, Francisco
of
P.O.
San
94120.
Phone
(415)544-2184.
@FedFRASER