15% of Industry Assets Seen at Risk in Next 15 Years

WASHINGTON - A new forecast by the Federal Deposit Insurance Corp. says that banks holding $506 billion in assets will fail between now and the year 2006.

That's about 15% of the industry's $3.4 trillion in assets.

Most of the failures are expected between 1992 and 1995, but the FDIC predicts that banks holding between $20 billion and $28 billion will fail each year between 1996 and 2006.

Bert Ely, president of the Ely & Co. consulting firm, said the FDIC's numbers are so dire that the agency is predicting "regulatory disaster."

Mandated by Congress

The forecast, released by the FDIC on Tuesday, was required by Congress. It shows how the FDIC plans to rebuild the Bank Insurance Fund. Congress ordered the FDIC to increase the fund's level to 1.25% of insured deposits within 15 years. At the end of last year, the fund's coverage ratio was negative 0.36%.

The projection shows the fund with a deficit through 1999, then edging up to the prescribed level by 2006.

According to that timetable, deposits insurance premiums would climb to an average of 28 cents per $100 of deposits next Jan. 1, as previously proposed, and stay at that level through 1997.

They would then fall to 26 cents in 1998, and to 24 cents in 2001. Under a proposed risk-based system, weaker banks would pay higher rates than stronger banks.

The FDIC projections are based on two other assumptions besides the amount of assets it will seize.

First, insured deposits are expected to grow on average a paltry 2.8% a year. (They grew 4.5% in 1991). Second, the FDIC projects losing on average 17 cents for every dollar of assets inherits from failed banks. Last year, the FDIC loss rate was 18%

Staying Flexible

FDIC staffers presenting the recapitalization schedule noted that as time goes on, the schedule may need to be revised. For instance, should interest rates go up, causing more banks to fail, then the forecast would become more pessimistic.

Chairman William Taylor was obviously uncomfortable committing the agency to such a long forecast.

When it came time for him to ask questions of the staff, Mr. Taylor turned to FDIC research director Roger Watson and said: "Can I ask maybe a few naive questions to get straight in my mind that this particular schedule is not a projection by the FDIC of what is going to happen for the next 15 years."

"That is correct," Mr. Watson dutifully replied.

"Then what is it?" Mr. Taylor asked.

"It is a synthesis of everyone's perceptions," Mr. Watson said.

Comments on the FDIC's recapitalization perception, as well as opinions on the premium increase, are due in mid August.

Also at its board meeting, the FDIC proposed a regulation that would bar insured state banks from making any equity investments not permitted for national banks. But because national banks are generally banned from buying stocks, this rule takes away that power that some states have granted their banks.

Any stocks already owned by state banks must be divested by December 1996 under the FDIC's rule. The agency is implementing a provision of last year's banking law designed to curb the powers some states have given their banks.

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