FDIC Bows To GAO on Fund's Audit

Restates 1990 Balance; Deficit Seen by Yearend

WASHINGTON -- Bowing to pressure from government auditors after months of haggling, the Federal Deposit Insurance Corp. said Friday that it ended 1990 with $4 billion in its Bank Insurance Fund coffers - not the $8.4 billion it previously reported.

And its auditor, the General Accounting Office, predicted in a report to Congress that the bank insurance fund would be broke by the end of 1991.

Responding to the news, House Banking Committee Chairman Henry B. Gonzalez said Congress may have to replenish the fund in the next 60 days. The Texas Democrat said that to head off a possible crisis he might push BIF refunding legislation ahead of the broad banking bill that is currently moving through Congress.

Crisis of Confidence Feared

"It is becoming increasingly clear that a delay in refunding BIF is a big gamble that will further erode the public's confidence in the financial and regulatory system," Rep. Gonzalez said.

Without an infusion of cash, the fund will close its 1991 books with a $5 billion deficit, the GAO said. The bank fund should have enough cash and credit to handle bank failures through Dec. 31; but once in the red, it will require authority to increase its borrowings from the federal government to continue to resolve institutions.

The FDIC tried to put the best face on the news, leaving mention of the dispute over the fund balance in the third paragraph of a news release issued Friday.

It led its announcement with an estimate that the bank insurance fund's balance stood at $4.5 billion at midyear. Higher deposit insurance assessments accounted for the increase from the FDIC's revised yearend balance.

Reform Bill in Jeopardy

Karen Shaw, president of the Institute for Strategy Development, said the GAO's "gloomy forecast for the FDIC's financial needs" increases the odds that Congress will abandon omnibus banking legislation and instead adopt a very narrow bill.

Both the FDIC and the Bush administration want legislation to replenish the bank insurance fund to be accompanied by broader powers for banks.

They maintain that the fund can be restored to health with $70 billion in borrowings that would eventually be repaid by the banking industry. Thus far, there is broad support in Congress for this approach.

Estimate Halved

The bank insurance fund's estimate of its reserves was halved because the General Accounting Office made the FDIC reserve an extra $4.3 billion in 1990 for losses at banks that are expected to fail in 1991.

Initially, the FDIC allocated only $3.4 billion to cover these contingent liabilities. The reserve total now stands at $7.7 billion. The reserves will cover some of the cost of the 160 to 170 bank failures that FDIC expects this year.

"The GAO wanted us to do this," said Caryl Austrian, an FDIC spokeswoman. "We're changing the methodology at their behest."

Seidman Disagreed

FDIC Chairman L. William Seidman had argued against amending the financial statements, saying the GAO's estimates were too gloomy and its timing of the loss recognition too aggressive.

However, "Most people have been somewhat skeptical of the FDIC's numbers," said Frank Anderson, a bank analyst at Stephens Inc., Little Rock, Ark.

Mr. Anderson said he agreed with the GAO's position that the FDIC should book anticipated 1991 losses at the end of 1990. "When was the last time somebody overestimated the cost of bank or S&L failures? Never."

Apart from the banks whose failures in 1991 have now been covered, the GAO said it has identified 34 banks, each with over $100 million in assets, that are likely to fail this year, costing the FDIC $5 billion.

In the next three years, the GAO expects 64 banks to fail at a cost of at least $22.5 billion. The FDIC will have to recognize some of the expected losses in 1991. Many smaller banks will also fail each year, the GAO said.

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