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Lawmakers examining bank failures, rise in risky loans

Copyright ) 2000 Nando Media Copyright ) 2000 Associated Press

Bank failures in 1999

WASHINGTON (February 8, 2000 11:15 a.m. EST http://www.nandotimes.com) - Lawmakers are examining the recent failures two big banks that involved fraud and cost the Federal Deposit Insurance Corp. nearly $1 billion. They also are looking over a recent nationwide increase in risky loans to people with poor credit histories.

The two recent bank failures - of First National Bank of Keystone, based in Keystone, W. Va., and BestBank of Boulder, Colo. - contributed to last year's biggest annual loss to the FDIC's insurance fund since the regional bank crises of the early 1990s.

Regulators and lawmakers are concerned about the eight U.S. bank failures last year, which occurred amid a booming economy. Compounding the worry, the FDIC is predicting that as many as 20 banks could go under this year.

Already, on Jan. 14, Iowa's banking superintendent closed the Hartford-Carlisle Savings Bank of Carlisle, Iowa, and the FDIC was named receiver. Regulators say fraud also was involved in that failure.

On Thursday, the FDIC told its 1,800 examiners to stay alert for warning signs of possible fraud at the banks they inspect. In addition, the agency recently proposed that capital requirements be doubled for banks that specialize in high-risk loans to people with inferior credit histories.

"The good news is that the American banking system has never been stronger" and that the FDIC's insurance fund is at a record high level of some $29 billion, Rep. Jim Leach, R-Iowa, chairman of the House Banking Committee, said in a statement Monday. "The bad news is that there have been several recent bank failures that have raised concerns about certain banking practices and types of lending, as well as the regulatory response when problems have been identified."

The top federal banking regulators were testifying Tuesday at a Banking Committee hearing on the recent failures.

Leach recently said some regulators may not have properly supervised the Keystone bank, which grew by paying high interest rates to attract capital from across the country, when it engaged in risky financial strategies.

He said it appears the FDIC was "stymied at key points" in its desire to examine the bank's activities, and that the independent FDIC and the Office of the Comptroller of the Currency - the Treasury Department agency that oversaw the bank - "failed to cooperate closely."

The FDIC's estimated $750 million loss caused by Keystone's collapse could put it among the 10 most expensive ever in this country.

As a result, Leach has proposed legislation that would give the head of the FDIC more authority over troubled banks.

A spokesman for the Treasury agency has disputed Leach's view of events, while FDIC Chairwoman Donna Tanoue has endorsed his proposal.

"We've learned some things from these cases," Tanoue told The Associated Press on Friday. "We want to improve our performance." She said the agency will commit "whatever resources are necessary" to investigate suspected bank fraud.

Leach also said the Banking Committee would "take a hard look" at the high-interest risky loans, known as subprime loans, which regulators have been warning banks about in recent months.

Like fraud, subprime loans also played a role in some of the eight U.S. bank failures last year.

BestBank, for example, sold high-interest credit cards as part of a travel-club membership to consumers with poor credit records. Its failure drained some $232 million from the insurance fund, which backs each account up to $100,000.

There has been disagreement among banking regulators over the FDIC's proposed definition of subprime borrowers. Critics of the proposal have maintained that under the definition - borrowers who have made two payments 30 or more days late or one payment 60 or more days late - many community banks that lend to low- and moderate-income people would be adversely affected.

The proposal applies to all forms of consumer credit, including home mortgages, credit cards, auto loans and personal loans.

The FDIC says it has found about 150 banks and thrifts with significantly high levels of subprime loans. Together, those institutions hold about 5 percent of total banking industry assets.

-- Homer Beanfang (Bats@inbellfry.com), February 08, 2000

Answers

Banks collapse worry congress

http://www.msnbc.com/local/WVVA/36581.asp

-- Homer Beanfang (Bats@inbellfry.com), February 08, 2000.