Each week, your local corner savings and loan association has watched the backing for its assets walk out the door as savers move their nesteggs into money market mutual funds, which pay higher interest.
If market interest rates remain high, this time next year that institution may have a different name after merging with several other banks in the neighborhood. The merger is but one technique the thrift industry is using -- at the government's urging -- to try to keep from going the way of Chrysler.
Last month US League of Savings Association reported the nation's savings and loans had a record net outflow of $1.7 billion. Many thrift institutions are mired in red ink as the outflows combine with low-yielding mortgages to squeeze their earnings.
Even the high liquidity of commercial banks could be stretched if customers take large portions of the $75 billion in money market certificates due over the next two months and switch them to money market funds.
In order to prevent a disaster type of scenario from developing at the thrifts, federal banking regulators have proposed remedies. John G. Heimann, outgoing controller of the currency, suggests that the government allow interstate savings bank mergers and the addition of some capital.
However, there are nearly as many opinions on what should be done to help the thrifts as there are banks. Many bankers believe money market funds should be muzzled. But this finds little support in Washington.
Rather, the Reagan administration believes deregulation is best solution. US Treasury Secretary Donald T. Regan noted in New York this week, "We are moving with deliberate haste" to deregulate the industry so it can compete with the money market funds for deposits. he quickly added that deregulation wouldn't come until the thrifts are in better financial shape to compete.
Saul Klamen, president of the National Association of Mutual Savings Banks, says what the thrifts need most is time. "We are expecting the economy to improve," he states, "and the rates of inflation to moderate some. So, it's a matter of buying time until our lower yielding assets run off and we can get the deposit flows to acquire higher yielding assets."
Mr. Klamen suggests allowing troubled thrifts to borrow from the Federal Deposit Insurance Corporation (FDIC), which has reserves of $12 billion. Klamen says this should be ample to take care of the thrifts over the current period without putting "any special tap on the Treasury."
He estimates that the "maximum loss to the mutual savings banks this year could be between $500 million and $1 billion." At the same time, the mutual savings banks have $12 billion reserves to back their $175 billion in assets. The savings and loan industry has deposits of more than $750 billion.
John W. Raber, chairman and chief executive officer of the Green Point savings Bank in Brooklyn, says savings banks "are not looking for a bail-out, but time to work out of the problems created by regulation and legislation."
These rules, he says, kept the lid on the mortgage rates banks could charge while allowing the rates paid to savers to increase.
Today, he says, the average portfolio yields about 8.25 percent, while current mortgage rates are 15 percent. At the same time, the bank pays depositors between 12 and 14 percent for its money. For an institution such as the Green Point, which invests 75 to 80 percent of its assets in mortgages, it takes time to increase this yield. However, in Green Point's case, an increase of about half a percent on its investment portfolio adds $4.5 million to its income.
The government has rescued some savings and loans encrusted with too many low-interest mortgages. Last year, the Federal Savings and Loan Insurance Corporation shelled out $1.3 billion to help 31 failing savings and loans merge into stronger institutions. It mainly bought the low yielding mortgages.
In spite of the headlines about the savings banks' problems, they have some underlying strengths. Standard & Poor's Corporation, a rating agency, recently reaffirmed its rating of A-1 for 28 thrift institutions while only downgrading six of them. The agency notes that in spite of their earnings problems, thrifts have excellent asset quality and new flexibility to attract deposits. In addition, these banks offer "personal touches," such as friendly managers and neighborhood get-
Why savings institutions are worried New savings deposits 1978 $23.5 billion 1979 $15.0 billion 1980 $10.7 billion 1981 n1 300 million
n1 January through March Source: US League of Savings Associations