WASHINGTON -- Offering another sign of confidence in the banking industry's strength, the Federal Deposit Insurance Corp. on Wednesday sharply cut its projection for bank failures.
The FDIC now predicts that commercial and savings banks with combined assets of about $10 billion are likely to fail in 1993, down from a previous estimate of $25 billion.
And in 1994, the agency expects banks with $20 billion in assets to fail, down from the previous projection of 445 billion.
Recent Turn of Events
"Many banks that just a few months ago appeared weak and at risk of closing now have been merged or have been able too increase their capital levels through improved profits or successful new equity offerings," said acting FDIC Chairman Andrew C. Hove.
The FDIC's reestimates come just two weeks after the agency announced record first-quarter earnings of $10.9 billion for commercial banks. Problem assets in the first three months dropped to their lowest level in almost three years.
No Premium Cuts in Sight
Despite the rash of good news for the industry, lenders should not look for the FDIC to cut deposit insurance premiums any time soon, the FDIC chairman said.
"Even if we are fortunate enough to see a continuing improvement in the volume of bank failures, it will be some years before the insurance fund is resorted to an adequate level," Mr. Hove said. The agency is required to bring the Bank Insurance Fund up to $1.25 for every $100 of insured deposits by 2006.
In March, the FDIC predicted that the BIF would be fully recapitalized by 2002. The agency has not officially changed that projection in response to continued improvements in the industry, but agency officials are growing more optimistic, said Roger Watson, FDIC's director of research and statistics.
"If I were a betting person, I would probably say it would be closer to 1997 or 1998," he said.
40 to 50 Expected to Fail
So far this year, 22 banks with combined assets of $2.7 billion have failed. Mr. Watson says he expects a total of 40 to 50 banks to fail this year, far fewer than some earlier forecasts of 120.
"We're not expecting an increase in the pace of bank failures," Mr. Watson said. Rather, the banks that fail in the next six months are likely to be larger than those that failed earlier in the year, he said.
The FDIC updates its projections for bank failures semiannually. In March, the agency announced its $25 billion estimate for 1993, down from $76 billion earlier. The estimate for 1994 was cut to $45 billion, down from $68 billion.
Another Sign of Health
This latest revision comes earlier than expected, FDIC officials said, because the Office of Management and Budget had requested more current projections.
The industry cheered the FDIC's forecast revision as another indication of a healthy banking system.
"It continues to put to rest the notion that banks are on the brink of failure," said James Chessen, chief economist of the American Bankers Association. "There is no taxpayer risk in the banking industry."
The FDIC's projected estimate of bank failures, while more accurate than before, is still too high, he said.
"You could cut the current estimate by a third and you'd be closer to reality," Mr. Chessen said.
Nonetheless, ABA officials said they hope the improved outlook for the banking industry eases Congress' fears about the industry and convinces it to loosen its legislative choke hold on banks.
While the FDIC, based on current estimates, will spend $1.4 billion on failed institutions in 1993, according to the ABA, premium income from lenders will be about $6.2 billion, adding significantly to the balance of the Bank Insurance Fund.