WASHINGTON The Federal Deposit Insurance Corp. underestimated the cost of resolving failed banks 62% of the time, according to a study just released by the agency's assistant inspector general.
John H. Hatch's report, dated March 22 but recently obtained under the Freedom of Information Act, evaluated how well the FDIC estimates the cost of bank failures.
Between September 1993 and January 1994, the inspector general's office studied the 122 banks that failed in 1992, the first full year that the FDIC's Division of Resolution was responsible for failures.
The assistant inspector general's detailed analysis of the 29 largest failures found that in 21. the estimate was off by more than 25%.
"An analysis of the banks on an individual basis shows some significant differences between the original recorded loss and the loss reserve as of Dec. 31, 1993." Mr. Hatch wrote.
Costs were overestimated in 11 failures and underestimated in 18, or 62%. With six banks, the FDIC lowballed its costs by 100% or more, according to the report.
The most inaccurate estimates were turned in for Heritage Bank for Savings and Shore Bank and Trust Co., where the failure cost soared more than 300% above estimates.
While the accuracy of the estimates for those 29 failures varied widely, the agency's aggregate $2.74 billion tab was off by just 11%, or $271 million.
The estimates of failure resolution costs are important because they are used to project future demands on the Bank Insurance Fund.
Also, because the FDIC by law must chose the "least costly" means to resolve failed banks, these cost estimates dictate what the FDIC will do with failing banks.
Finally, cost estimates are important because they dictate how much money uninsured depositors will get when a bank fails.
Excluded from the audit were the two biggest failures of 1992: First City Bancorporation's 20 units and Crossland Federal Savings.
Among the four other largebank failures, the most accurate loss projection was made in Dollar Dry Dock. The FDIC estimate on the $3.8 billion-asset institution was $578 million; as of December 1993, its losses were predicted to run 9% less, or $524 million.
The least accurate estimate on a large bank was made on the $3.2 billion American Savings. The $423 million estimate came in 66% higher.
The two other $3 billion-plus banks were Meritor Savings Bank, which the FDIC underestimated by 53%, and The Howard Savings Bank, which came in 66.3% below estimates, according to Mr. Hatch's report.
The inspector general's office put some of the blame for the erroneous estimates on increases in indirect expenses, that is liquidation expenses that cannot be charged to specific assets. The FDIC miscalculated these costs, such as salaries and other overhead, on average by 50%, according to the report.
Mr. Hatch also singled out asset value estimates for criticism. The report lists asset values for 14 of the banks that failed in 1992.
The change in eSt|ated losSes on those banks' assets ranged from 796% 'for Riverhead Savings Bank to 48% for Plymouth Five Cents.
The way the FDIC estimates costs was changed about. halfway through 1992 by Hamson Young, who was recruited from Wall Street to head the division when it was created in 1991. The report said the change improved the agency's forecasts. Mr. Young resigned from the agency last week.