Connecticut Moves to Aid Ailing Banks

The Connecticut legislature has passed a bill designed to bail out troubled banks with money from taxpayers, private investors, and the Federal Deposit Insurance Corp.

The unusual measure, which the governor is expected to sign, calls for establishment of a quasigovernmental agency that would invest capital in troubled state-chartered institutions.

If successful, the program could rescue 10 to 20 banks, according to the state's banking commissioner, Ralph Shulansky.

Necessary Role for FDIC

The law allows up to $10 million in taxpayer funds to be invested in the agency, underscoring the significance legislators are attaching to the state's growing banking problems.

In addition, about $30 million would be sought from outside investors.

While the law does not specify FDIC assistance, the program won't get off the ground without it, Mr. Shulansky said.

FDIC Chairman L. William Seidman said his agency has not yet agreed to participate, but added, "it is certainly something we are discussing seriously with them."

Controversial Issue

Providing assistance to troubled institutions that have not been seized is a controversial issue. The FDIC is reviewing its rules, Mr. Seidman said.

Currently, the agency requires a bank's shareholders to be virtually wiped out before providing assistance. Mr. Seidman said that provision may need to be relaxed if the agency is to prevent banks from failing.

Connecticut, by most measures, is suffering the most widespread banking problems in the country. Last year, two-thirds of the state's banks lost money. Five to 10 banks are in serious danger of failing, according to Mr. Shulansky. Many more institutions do not meet capital requirements.

A Brake on State Economy

The woes are dragging down the state's economy. Lending has shrunk by $8 billion in the last six quarters, said Mr. Shulansky, a former banker and state legislator.

The legislation, passed on Wednesday, is geared at both keeping banks alive and making more credit available.

The law would set up the Connecticut Bank Funding Corp., which would buy stock in troubled state banks judged to have a chance of recovering. A recapitalization could require bank management to be removed and shareholders to lose most of their investments, Mr. Shulansky said.

The regulator said outside investors would be attracted by good returns.

Merger Possibilities

"With adequate capital and good management, a bank can earn its way out of difficulty quickly," he said.

The corporation, which is expected to exist for 20 years, also would arrange mergers of institutions, he said.

The corporation's income is exempt from state taxes until 2012.

Mr. Shulansky said that as of March 31, the state-chartered commercial and savings banks and the national banks operating in Connecticut had nonperforming assets of $6.5 billion. That figure outstrips the $4.1 billion in equity capital and $1.7 billion in loan-loss reserves held by these institutions.

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