Fed Aid to Southeast Bank Rocks Boat
WASHINGTON -- By lending to Southeast Bank of Miami through its discount window, the Federal Reserve is jeopardizing a delicate compromise with Congress regarding aid to troubled banks.
Rep. Henry B. Gonzalez, D-Tex., chairman of the House Banking Committee, hammered out the compromise this summer to prevent the central bank from propping up banks that are likely to fail.
An amendment to this effect, attached to the reform bills passed by the House and Senate banking committees, would not kick in for two years - as long as the Fed complied with the spirit of the measure immediately.
Rep. Gonzalez is concerned that the Fed is not living up to its end of the deal, which he sought to limit the cost of failures borne by the Federal Deposit Insurance Corp.
Fed Denies Violating Deal
"They [the Fed] were supposed to be implementing the spirit of the amendment right away," said a House Banking Committee staff member. "If they handle this the same old way, it is going to cause the committee to look again at the approach taken in its amendment."
Fed spokesman Joseph Coyne denied that the Fed is violating its deal. "We are following the guidelines envisioned in this legislation."
But "they are telling the guys on the Hill one thing, but they are still funding these turkeys' deposit outflows," a former regulator said.
The unit of Southeast Banking Corp., which has lost almost $500 million over the past seven quarters, is viewed as a candidate for seizure by regulators. Bids to buy the bank with federal assistance were due at the Federal Deposit Insurance Corp. Sept. 12.
Faced with a cash crunch, Southeast has borrowed from the Fed for seven consecutive weeks, according to sources.
A House Banking Committee analysis released in June showed that 90% of the banks that took extended loans through the discount window from 1985 to 1991 failed. Bank of New England in Boston borrowed $2.3 billion in the six months prior to its collapse in January.
The Fed and its supporters argue that to maintain stability it must be able to lend to banks with liquidity problems.
Bill Would Require Certification
The banking bill with its amendment intact would not allow the Fed to make secured loans to undercapitalized banks for more than 60 days in any 120-day period, unless the bank's primary regulator or the Fed certifies that the bank is unlikely to fail. In any case, if an undercapitalized bank is borrowing from the window for five days before it fails, the Fed would have to absorb some of the FDIC's losses.
Southeast began borrowing from the Federal Reserve Bank of Atlanta on July 25 and is believed to have increased its dependence on the discount window each week since. Borrowing from the Atlanta Fed hit $530 million Sept. 11.
While Southeast may not be responsible for all of that borrowing, as the most troubled bank in the region it is presumed to be the Atlanta Fed's biggest customer. A Southeast spokesman said Monday the bank has no comment beyond a recent Securities and Exchange Commission filing, which admitted that the bank was borrowing from the Fed to remain liquid.