The possibility of failures -- or near-failures -- of troubled banks and savings-and-loan associations in coming months is a source of growing concern for US bank regulators.
Although interest rates are starting to fall from historic highs registered earlier this year, many financially strapped institutions find themselves locked into paying high rates on certificate accounts. Meanwhile, the drop into recession raises the danger of failures by businesses having heavy loan commitmennts from local financial institutions. That grim combination, one federal regulator says, "poses substantial risk for the banking industry."
While deposits in nationally regulated institutions are now fully insured up to $100,000 -- thus posing little risk for the depositor in event of a bank failure -- the threat of some shaky institutions' "going under" or being forced into merger raises the disturbing possibility of a larger public "crisis of confidence" in the banking system in general. Public unease about the industry could drive depositors to shift their deposits to alternative savings or investment facilities, such as money-market funds, although these are not insured.
According to many industry observers, a number of warning signs are flashing for financial institutions:
* The troubled First Pennsylvania Bank, the largest bank in Philadelphia and the 23rd largest in the United States -- has just been granted a $500 million assistance package from the Federal Deposit Insurance Corporation (FDIC) and 22 other banks.
* In March, federal regulators stepped in and declared a Cleveland savings and loan association insolvent. To prevent any loss of depositor money the federal officials quickly arranged a takeover by another S&L.
* In early April, the Federal Home Loan Bank Board, which oversees federally chartered S&Ls and mutual savings banks, announced that special funds would be available to financially hard-pressed institutions.
* Federal regulators have sent landmark legislation to Congress that would allow out-of-state institutions to take over failing commercial banks, mutual savings banks, and s&Ls.
The FDIC listed 287 "problem banks" at the close of 1979.
But many observers here believe the S&Ls and mutual savings banks -- which must pay out high interest rates on savings certificates, yet post modest earnings on low-rate home mortgages -- face the greatest threat in event of a deep recession.
Thrift officials, for their part, believe that the downturn in rates means an easing of the problem for many S&Ls and mutual savings banks.
"There's been a clear turning point, not for earnings, but a measurable improvement in deposit flows," says Saul B. Klaman, president of the National Association of Mutual Savings Banks.
The March deposit "outflow" for mutuals, Dr. Klaman notes, was $750 million, far ahead of the previous loss of $88 million, posted back in 1970. But Dr. Klaman believes that the easing of interest rates suggests that April withdrawals will be back below the March record.
William B. O'Connell, executive vice-president of the US League of Savings Associations, a trade arm of the S&L industry, notes that during recent weeks he has been at four management conferences at which 2,500 S&Ls were represented. While there is "concern about earnings," he points out, there is no fear about the collapse of S&Ls, or pronounced merger activity.
Earnings, though, he says, will be down again in the second and third quarters after a first-quarter decline.
According to Mr. O'Connell, "Loan delinquency figures are at an all-time low, " which adds up to a plus for the industry. Even during the severe 1973-75 recession, he notes, "delinquency and foreclosure figures rose only modestly."
On May 5, Morgan Guaranty Trust Company, the country's fifth-largest bank, cut its prime lending rate to 17 1/2 percent. Still, the continuing drop in rates will not help many S&Ls, which must muster up revenues during the next few months to pay interest on money-market certificates with yields of 15 percent or so.
Money-market certificates, according to federal regulators, make up close to a third of S&L deposits.