House Panel Votes to Close Banks if Capital Dips to 2%
WASHINGTON -- The House Banking Committee voted Thursday to require regulators to close a bank within six months if its equity capital falls below 2% of assets.
The vote reflects a strong determination among legislators burned by the thrift crisis to act against marginally capitalized institutions that are moving toward failure. It also provides evidence of a growing distrust of regulators' discretion.
The committee brushed aside warnings from Rep. John J. LaFalce, D-N.Y., that the measure, part of broad banking reform legislation, would unnecessarily hamstring regulators and force banks with a chance of recovery into receivership.
As of yearend, 90 banks with $22 billion in assets had positive capital ratios under 2%. In addition, 79 banks with $26.3 billion in assets had ratios between 2% and 3%.
A Temporary Exemption
The yardstick in the bill is so-called Tier 1 capital, which consists primarily of common and preferred stock.
Thrifts that are complying with capital-raising plans approved by regulators would be exempt from the provision until July 1994.
Rep. LaFalce, with the support of the Bush administration and Federal Deposit Insurance Corp. Chairman L. William Seidman, proposed giving regulators more flexibility to keep institutions open until July 1993, when the hard-and-fast 2% cut-off would take effect.
But preferring to keep regulators on a short leash, the House committee rejected Rep. LaFalce's amendment by a 28-to-21 vote. The stricter measure was approved by a voice vote.
A Bar to Recovery Seen
The FDIC chairman had warned that the measure would force action against a number of institutions that would otherwise recover.
"Had a 2% critical capital requirement been in effect since 1986, 46 banks that subsequently recovered would have been closed at an estimated cost of between $1.6 billion and $2.2 billion," Mr. Seidman said.
The regulator did not provide an estimate of how much would have been saved by the early closure of undercapitalized institutions that did fail.
Short-Term Disruption
Mr. Seidman added that the 2% requirement might have a positive effect on the system over the long run, "but with short-term disruption and increased short-term costs."
The General Accounting Office, the congressional watchdog agency, warned in a letter to Rep. Frank Annunzio, D-Ill., that an earlier version of the LaFalce amendment was a "forbearance" measure that would "undermine the credibility of the entire concept of early intervention."
The measure adopted Thursday is less severe than a provision adopted last month by a subcommittee, which would have given regulators only 30 days to close weak banks.
Rep. LaFalce proposed softening it further by giving regulators latitude to keep open institutions that complied with an approved capital plan. The institution would also have to be profitable and able to show a record of "serving the credit needs of the local market."
Rep. Jim Slattery, D-Kan., told the panel that regulators needed more flexibility than the adopted amendment would provide.
"It is their responsibility to clean up [the industry] and when the head regulator says this is the way to do it, I think we should listen," Rep. Slattery said.
That remark reflected a growing willingness among the committee members to curb the discretion of regulators in light of the heavy losses from thrift failures and projections of a deficit in the FDIC's fund.
Capital Levels Established
The adopted amendment, which was sponsored by the committee chairman, Henry B. Gonzalez, D-Tex., and three other members of the panel, puts into place five capital levels, with different regulatory requirements at each level.
As a bank's capital is depleted, regulators are given less flexibility and finally required to close the bank when it dips below 2%.
PHOTO : Rep. John J. LaFalce His warnings went unheeded
