A chill on bankers' row
Gold prices are soaring again as a nervous financial community questions the stability of the world's banking industry.Skip to next paragraph
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Besieged by worrisome news, investors have been buying the precious yellow metal as an insurance measure. The price soared $32 in London Thursday and another $45.25 Friday to $455 per ounce.
A Zurich bullion dealer was quoted as saying: ''People are responding to the world's poor economic health - and gloomy reports. . . .''
But Preston Martin, vice-chairman of the board of governors of the Federal Reserve System, commented last week during a visit to Boston: ''I am not much concerned with the safety and soundness of the banking system.''
One unconfirmed rumor bothering investors was that Argentina might repudiate its $39 billion of debt owed to foreign creditors, some $12 billion of which falls due in the next 12 months. Some have questioned the soundness of tens of billions in bank loans to Brazil, Venezuela, and Chile. The fuss over lining up a nearly $10 billion loan package to rescue Mexico didn't help. Also Cuba, hard-pressed by the decline in sugar prices, has asked its noncommunist bank lenders for a delay until 1985 in the repayment of nearly $1 billion in loans that fall due between this year and 1985.
Fresh in memory are the debt problems of Poland and other communist countries , the billion-dollar problem of Banco Ambrosiano SA of Milan, Italy, and the failure of Penn Square National Bank in this country.
Besides all that, the economic recovery has been slower arriving than anticipated in both the United States and Western Europe.
Sometimes, Mr. Preston admits, an individual institution may get in trouble and need somehow to be rescued, usually by merger with a more financially sound bank. ''But the system is sound,'' he figures.
Mr. Martin, who was sworn into office March 31, pointed out that a bank failure acts as a warning. ''Other financial institutions, seeing what happens to Institution A, begin to shape up.''
For instance, as a result of the Penn Square failure, credit unions, savings-and-loan associations, and other loan participants are much more cautious, insisting on proper documentation. Credit unions, he suggested, perhaps ought to hire a full-time person ''who knows something about balance sheets.''
He concluded that the new ''discipline and financial responsbility in the financial system will serve us well over the next few years.''
As the aftermath of an ''inflationary binge,'' some failures should be expected, he added. But he finds ''little substance'' in the doomsday outlook for the banking industry portrayed by some market letters.
Indeed, Mr. Martin maintained that commercial banks should ''from time to time have losses and from time to time have delayed payment'' on their loans to nations.'' Country loans, he says, are ''a proper activity for banks and will continue to be a proper activity.'' Nations have become highly dependent on one another financially and economically. ''We do live in a global village,'' he said. And such loans do have their risks.
Speaking of charges that Citibank or other major national banks are in deep financial trouble, he said: ''That is, of course, nonsense.'' If there were any truth to such reports, he said, one of the federal regulatory agencies would have merged such an endangered bank into another sounder bank.
In an earlier interview, Frank E. Morris, president of the Federal Reserve Bank of Boston, promised that the central bank would move quickly to prevent the spread of any financial panic.
''We are quite willing and ready to move very forcefully to forestall this sort of thing happening. The lender-of-last-resort function (of the Fed) takes precedence over our concern for the rate of growth in the money supply,'' he said.
Nonetheless, he is bothered by the lack of liquidity - available cash - in the nation's corporations and banks.
''It is a matter of concern to all of us,'' he said, speaking of the policymaking 12-person Federal Reserve Open Market Committee. ''We know the economy is under very considerable financial strain, not only because of the level of interest rates, but because that level of interest rates is imposed on a system whose liquidity has been eroding for several years. It is therefore much more vulnerable to shocks.''
Mr. Morris said that he has no idea of where the next financial crisis will arise. The rule of thumb, he said, is that the things you can foresee will not cause you much trouble.
Nevertheless, he maintained that the Fed has learned from earlier crises that ''if we get in quickly and are prepared to deal with the situation, you can restore confidence without the Federal Reserve having to put a lot of money in the system.''
His implication was that the Fed would act immediately to deal with any future financial crisis.