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Managing the Crisis: The FDIC and RTC
Experience
Chronological Overview: Chapter Six—1983
Unveiling of the design for a commemorative U.S. postage stamp
marked the fiftieth anniversary of the FDIC. Although the anniversary was
observed in a festive atmosphere, 1983 was a year of serious and intense
activity for
the FDIC.
Table 6-1
1982 - 1983: FDIC at a Glance ($ in Millions) |
|
12/31/82 |
12/31/83 |
Percent Change |
Number of Bank
Failures * |
34 |
45 |
32.35% |
Assistance to
Open Banks |
8 |
3 |
-62.50% |
Total Failed
and Assisted Banks |
42 |
48 |
14.29% |
Total Assets
of Failed and Assisted Banks |
$11,722.6 |
$7,191.7 |
-38.65% |
Losses on Failed
and Assisted Banks |
$1,168.6 |
$1,407.0 |
20.43% |
Losses as a Percent
of Total Assets |
9.97% |
19.56% |
96.29% |
Assets in Liquidation |
$2,155.1 * |
$4,259.6 |
97.65% |
FDIC Staffing |
3,504 |
3,846 |
9.76% |
Number of Problem
Banks |
369 |
642 |
73.98% |
Deposit Insurance
Fund Balance |
$13,770.9 |
$15,429.1 |
12.04% |
Deposit Insurance
Fund Balance as a Percent of Insured Deposits |
1.21% |
1.22% |
0.83% |
*Figure
as of 11/30/82. Year end figure was not available.
Back to table
Source: FDIC, 1983 Annual Report and Reports from FDIC Division
of Finance and Division of Research and Statistics.
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Notable Events
In April 1983, in response
to the Garn-St Germain Depository Institutions Act of 1982, the FDIC submitted
to Congress a deposit insurance study entitled Deposit Insurance in a Changing
Environment. The FDIC stressed two themes: (1) marketplace discipline must
increase as government controls on the banking industry decrease; and (2)
major reforms of the regulatory and insurance systems must occur for those
systems to continue to be effective and equitable in a less regulated environment.
Legislation was introduced late in 1983 to strengthen and refine the provisions
of the Federal Deposit Insurance Act of 1950. Among its provisions, The
Federal Deposit Insurance Improvements Act of 1983 authorized the FDIC
to vary deposit insurance premium rebates on the basis of the risk that
any insured bank represented to the insurance fund. It also required that
the FDIC be designated receiver of any closed bank, and it would set priorities
for the payment of claims against the failed bank.
Economic/Banking
Conditions
The country saw
much better economic times in 1983, as the economy began to rebound
from the recent recession. Gross Domestic Product (GDP) was up about
4 percent.6-1 Inflation
was less than half what it was just two years previously, standing
at 4.3 percent.6-2 The
unemployment rate held steady at 9.6 percent.6-3 Employment
growth was meager at 0.2 percent.6-4 Interest
rates continued to fall; the discount rate was 8.5 percent, and the
30-year mortgage rate was at 13.2 percent.6-5 Following
the rapid expansion of lending in commercial real estate markets, the
office vacancy rate
continued to rise and was at 13.4 percent.6-6 Growth
in the residential real estate markets was substantial with home sales
up 38.2 percent
and housing starts up 60.4 percent, after both had experienced a three-year
skid.6-7
In the Southwest, farmers were still experiencing hard times as farm loans
peaked and farm debt continued to increase. Agriculture prices continued
their decline.6-8 The downturn in the agricultural sector in recent years
was beginning to take its toll on agricultural banks. Real farm income
was down to $8.2 billion (from $22.8 billion in 1980) while total farm
business liabilities had nearly tripled from their 1970 values, reaching
a peak for the 1980s of $207 billion.6-9 6- The percentage of nonperforming
loans at agricultural banks continued to rise.
Commercial vacancy rates were on the rise in the Southwest; for instance,
the commercial vacancy rate in Houston, Texas, was up to 27 percent.6-10 Despite the rising vacancy rates, total real estate loans rose to
15.1 percent of assets, up from 12.4 percent in 1982, including a
large increase
in commercial real estate loans, from 5.1 percent of assets in 1982
to 6.4 percent in 1983. Gross State Product growth for the Southwest
region was minimal and well below the national GDP growth rate.6-11
The Northeast enjoyed a quick recovery from the national recession,
and expansion began in the real estate market. Institutions’ real
estate portfolios increased at a rate two times the national average.
The region also saw above average growth in overall production and lower
unemployment rates than the rest of the U.S.6-12
California also saw expansion in its economy, especially in the construction
industry, as the number of housing permits increased.6-13 There continued
to be many newly chartered banks in the state. Total real estate loans
increased to 17.9 percent of assets, up from 15.2 percent a year earlier,
and commercial real estate loans, at 3.4 percent of assets, also rose throughout
the state.
The downturn in the agricultural sector in recent years was beginning
to take its toll on agricultural banks, and the percentage of nonperforming
loans at those banks continued to rise. There were, however, 378
newly chartered banks. The Office of the Comptroller of the Currency and
the
Federal Reserve Board extended capital reserve requirements to include
multi-national banks. Lesser developed countries (LDC) debt improved
as twenty-seven countries were able to reach restructuring agreements regarding
the payments of their obligations.6-14
The need for major changes in the regulatory and deposit insurance structures
became increasingly apparent in 1983. Mechanisms crafted half a century
earlier to regulate and insure banks were no longer adequate. The most
fundamental change flowing from deregulation had been the growth of competition
in banking markets. That enhanced competition led to increased risk-taking
and greater opportunities for banks to fail.
At the end of 1983, there were 642 banks on the problem bank list, compared
with 369 on the list at the end of 1982. The increase in the number of
banks on the list during 1983 reflected the continued affects of the 1981-1982
recession and increased competition among banks due to deregulation.
Table 6-2 shows the number and total assets of FDIC insured institutions,
as well as their profitability as of the end of 1983.
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Table 6-2
Open
Financial Institutions Insured by FDIC ($ in Billions)
Commercial
Banks – FDIC
Regulated |
|
1982 |
1983 |
Percent Change |
Number |
14,451 |
14,469 |
0.12% |
Total Assets |
$2,193.3 |
$2,342.1 |
6.78% |
Return on Assets |
0.70% |
0.66% |
-5.71% |
Return on Equity |
12.02% |
11.90% |
-1.00% |
Savings Banks – FDIC
Regulated |
|
1982 |
1983 |
Percent
Change |
Number
|
315 |
294 |
-6.67% |
Total Assets |
$155.0 |
$170.7 |
10.13% |
Return on Assets |
-0.79% |
-0.10% |
87.34% |
Return on Equity |
-15.62% |
-2.18% |
86.04% |
Savings Associations – FHLBB
Regulated |
|
1982 |
1983 |
Percent Change |
Number
|
3,349 |
3,183 |
-4.96% |
Total Assets |
$699.5 |
$819.1 |
17.10% |
Return on Assets |
-0.63% |
0.26% |
-- |
Return on Equity |
-17.52% |
8.51% |
-- |
Percent
change is not provided if either the latest period or the year-ago
period contains a negative number.
Source: Reports from FDIC Division of Research and Statistics.
Bank
Failures and Assistance to Open Banks
Despite the turnaround in the economy, there were 45 bank failures
and 3 assisted mergers of mutual savings banks, a post-Depression record.
That number included several large institutions, which resulted in
a substantial increase in the volume of failed bank assets held by
the FDIC, as receiver.
In order to handle those assets more efficiently, the FDIC decentralized
its liquidation operations. It opened and staffed five new area liquidation
offices, with each office responsible for ten states. The offices were
located in Atlanta, Chicago, Dallas, and San Francisco, (the New York
office opened
in November 1982.)
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In
1983, the FDIC developed an alternative to a deposit payoff when
no assuming bank could be found for the failed bank. In an Insured
Deposit
Transfer (IDT), the FDIC transferred all the insured deposits to
a healthy institution. Former depositors of the failed bank could
then
leave their accounts in the transferee bank or move their deposits
to another financial institution. An IDT minimized the disruption
to the closed bank’s customers and to the affected community.
The procedure also reduced the FDIC’s cost in handling a failure
because the FDIC did not have the burden of directly paying each customer.
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Of
the 48 banks that failed or were assisted, the FDIC resolved 36
institutions through purchase and assumption (P&A) transactions.
There were seven deposit payoffs, and two institutions were resolved
using a
new procedure called “insured deposit transfer (IDT).” The
three assisted mergers of mutual savings banks are discussed below.
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- The FDIC assisted
the merger in New York City of Dry Dock Savings Bank into The Dollar
Savings Bank under the Voluntary Merger Plan. The resulting institution
had combined assets exceeding $5 billion.
- In Oregon, a change
in state law made possible the conversion of Oregon Mutual Savings
Bank into a stock-form state chartered bank and its subsequent acquisition
by
Moore Financial Group, Inc., Boise, Idaho. The FDIC assistance consisted
of a cash payment of $11.8 million.
- Auburn Savings Bank,
Auburn, New York, was absorbed by Syracuse Savings Bank. The cost
of the FDIC assistance was $2.9 million.
At the end of the year 1983, 23 depository institutions had net worth certificates
outstanding which totaled $376.8 million.
A recent estimate of losses per transaction type is shown in Table 6-3.
Table 6-3
1983
Losses by Transaction Type ($ in Millions) |
Transaction
Type |
Number
of
Transactions |
Total
Assets |
Losses |
Losses
as a
Percent of Assets |
OBA |
3 |
$2,851.1 |
$71.3 |
2.50% |
P&As |
36 |
4,143.2 |
1,309.8 |
31.61% |
IDTs |
2 |
47.3 |
13.9 |
29.39% |
Payoffs |
7 |
150.1 |
12.0 |
7.99% |
Totals |
48 |
$7,191.7 |
$1,407.0 |
19.56% |
Source: Reports from FDIC Division of Research and Statistics.
The failure of the United
American Bank (UAB), Knoxville, Tennessee on February 15, initially made
headlines because its owner, Jake Butcher, was the principal organizer and
promoter of the 1982 World’s Fair and twice was a candidate for governor
of the State of Tennessee. The deposit liabilities and assets of UAB were
transferred to First Tennessee Bank of Knoxville, a subsidiary of First Tennessee
Corporation, Tennessee’s largest bank holding company. The transaction
was noteworthy because it marked the first use of the extraordinary acquisition
provisions of the Garn-St Germain Depository Institutions Act of 1982.
Before the year was out, seven more Tennessee banks controlled by Jake
Butcher or his brother, C.H. Butcher, Jr., failed. There were almost daily
reports of an excessive volume of classified loans, loans to insiders,
loans far from the bank’s trade area, and evidence of inaccurate
or deliberately misleading accounting.
The Butcher organization, including approximately 40 loosely affiliated
banks and savings and loan associations, operated in two FDIC regions and
three Federal Reserve Districts. A total of seven different regulatory
agencies were responsible for supervising the institutions, making the
detection of problems within the combined organization extremely difficult.
The insolvency of United American Bank and, subsequently, of other Butcher-related
institutions, was discovered only because the FDIC undertook a simultaneous
examination of the major Butcher-affiliated banks, committing to the task
nearly 10 percent of its field workforce for almost three months. At the
end of 1983, the FDIC estimated that its losses in connection with the
eight failed Butcher banks would amount to approximately $382.6 million.
Payments to Depositors and Other Creditors
In the 48 banks that failed or were assisted in 1983, there were 934,023
deposit accounts with $5.8 billion in deposits. Of those totals, the seven
deposit payoffs represented 16,813 deposit accounts and $139.2 million in
deposits. The three assistance agreements represented 388,290 deposit accounts
with $2.4 billion in deposits.
Of the 668 banks6-15 that failed or were assisted since the FDIC’s
inception in 1934, there were 340 P&A transactions and assistance agreements
and 328 deposit payoffs including IDTs. All the accounts in the P&A
transactions and the assistance agreements, with deposits aggregating $24.2
billion, were fully protected. In the deposit payoffs, 85.5 percent of
the $1.1 billion in deposits had been paid by year-end 1983.
Total disbursements by the FDIC since January 1, 1934, amounted to $10.9
billion. Of that amount, the FDIC recovered $8.3 billion for a net loss
of $2.6 billion.
Asset Disposition
At the beginning of 1983, the FDIC had $2.2 billion in failed bank
assets. The 45 bank failures in 1983 had an aggregate of $4.3 billion
in assets, some of which were sold at resolution. The FDIC’s inventory
of assets in liquidation almost doubled. Gross collections for the
year were $269 million. At the end of 1983, the FDIC’s total workload
had increased to 65,000 assets with a book value of $4.3 billion.
Table 6-4 shows the FDIC’s assets in liquidation and Chart 6-1 shows
the asset mix.
Table 6-4
1983
FDIC End of the Year Assets in Liquidation ($ in Billions) |
Asset
Type |
12/31/82
Book Value |
12/31/83
Book Value |
12/31/83
Est. Recovery Value |
Loans |
$1.1 |
$2.5 |
$1.6 |
Real EstateMortgages |
0.4 |
0.4 |
0.4 |
Investments |
0.2 |
0.3 |
0.3 |
Owned Assets |
0.1 |
0.2 |
0.1 |
Charge-Offs |
0.0 |
0.3 |
0.3 |
Securities |
0.1 |
0.1 |
0.0 |
Other Assets/Judgments |
0.3 |
0.5 |
0.2 |
Totals |
$2.2 |
$4.3 |
$2.9 |
Source: Reports from FDIC Division of Finance.
Figure
6-1
1983
FDIC End of Year Asset Mix
d
Figure
6-2
FDIC Staffing
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d |
Insurance
Fund and Staffing The deposit insurance fund continued to grow in 1983, although
numerous bank failures created large expenses for the FDIC. The fund
reached a new high of $15.4 billion, an increase of $1.7 billion.
The FDIC ended 1983
with 3,846 employees, an increase of 342 over 1982. The Division
of Liquidation staff increased from 778 at the end of 1982 to 1,153;
most of that increase
involved temporary employees hired to cope with the increased number
of bank closings. The Division of Bank Supervision staff, however,
fell from 2,129
at the end of 1982 to 2,053. Chart 6-2 shows the staffing levels
for the past five years. |
Private
Resolutions The failure of the Nebraska Depository
Institution Guaranty Corporation (NDIGC) was caused by the failure
of its largest member, Commonwealth Savings Company (Commonwealth),
Lincoln, Nebraska, which held approximately 20 percent of the
deposits insured by NDIGC. The state closed Commonwealth on November
1, 1983, freezing deposits of $67 million. That failure was due
to a combination of factors, including mismanagement, insider
fraud and abuse, and hesitancy on the part of state regulators.
To conserve liquidity, state regulators ordered NDIGC members
not to make early payments on investment certificates, which were
similar to certificates of deposits.
The closure sparked runs on other NDIGC insured institutions. Losses
to depositors from the Commonwealth failure were initially about $56
million; the NDIGC’s reserves were only $1.5 million. In July
1984, State Security Company, NDIGC’s second largest member,
went into bankruptcy, followed by American Savings Company, the third
largest member, in January 1985. By March 1992, liquidation of the
three failed industrial savings companies had reduced aggregate losses
to depositors to about $33 million. Part of the gain for depositors
included a payment of $8.5 million made by the state of Nebraska in
1986 to settle a negligence suit against the Department of Banking
and Finance.6-16
State insurance funds were more vulnerable to depositor runs than
the FDIC’s insurance fund. Runs on deposits, usually a regional
occurrence, strained liquidity, leading to insolvency of the state
insurance fund. Whereas, the FDIC’s insurance fund withstood
regional disturbances.
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6-1
Bureau of Economic Analysis, Department of Commerce. Back
to Text
6-2
Bureau of Labor Statistics, Department of Labor. Back
to Text
6-3
Bureau of Labor Statistics, Department of Labor. Back
to Text
6-4
CB Commercial Torto/Wheaton Research. Back to Text
6-5
Housing Market Statistics, National Association of Home Builders (June
1996), and Federal Home Loan Mortgage Corporation. Back
to Text
6-6
CB Commercial Torto/Wheaton Research. Back to Text
6-7
Housing Market Statistics, National Association of Home Builders (June
1996). Back to Text
6-8
Economic Report of the President, 1986. Back to Text
6-9
Federal Reserve System, Board of Governors, Flow of Funds Accounts, Table
L. 102. Kevin L. Kliessen and R. Alton Gilbert, “Are Some Agricultural
Banks Too Agricultural?” Federal Reserve Bank of St. Louis Review 78,
No. 1 (January/February 1996): 26. Sada L. Clarke, “The Outlook for
Agriculture in ‘82,” Federal Reserve Bank of Richmond Economic
Review (January/February 1982): 25-29. Back to Text
6-10
CB Commercial Torto/Wheaton Research. Back to Text
6-11
Bureau of Economic Analysis, Department of Commerce. Back
to Text
6-12
Bureau of Economic Analysis and Bureau of Labor Statistics, Department
of Labor. Back to Text
6-13
Bureau of the Census, Building Permits Section, Manpower and Construction
Statistics Branch. Back to Text
6-14
Philip A. Wellons, Passing the Buck: Banks, Government and Third World
Debt (1987), 225. Back to Text
6-15
This figure does not include open bank assistance transactions from 1934-1980.
The FDIC did not begin including assistance agreements with the failures
for reporting purposes until 1981. Five assistance agreements, with total
deposits of $6.8 billion, should be included in the overall totals. Back
to Text
6-16
William B. English, “The decline of private deposit insurance in the
United States” (Carnegie-Rochester Conference Series on Public Policy,
1993), 67-68, 114-115.Back to Text
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