The squeeze on S&Ls
The cool professionalism and surface calm still pervading the stately offices of many an American savings and loan association have yet to fully mirror the turmoil and concern found in their executive suites. But the fact is that the US thrift industry -- S&Ls and mutual savings banks -- is in serious trouble given rising interest rates. Simply put, thrifts are caught in a classic and enormously difficult cost-price squeeze that is showering many institutions with red ink, forcing marginal associations into mergers, and seriously imperiling the available capital needed to finance home mortgages.
The typical thrift these days earns about 9 percent on its outstanding loan portfolio. But it has to pay out over 15 percent interest on six-month money market certificates and 12 percent on 30-month certificates. And it faces hard competition from money market mutual funds. For these reasons it should perhaps come as no surprise that S&Ls posted a $358 million decline in net worth in April, the largest such loss recorded. For the first four months of this year the industry's net worth plummeted over $1 billion, to $31.4 billion.
Technical factors (such as the April 15 IRS tax deadline, when many persons withdrew funds to meet their taxes) should not be used to minimize the outflow and the need for careful federal support of the thrift industry. The public need not be fearful of a full-scale "crash" of the industry, as happened to the banking industry in the early 1930s. But at the same time the situation is now serious enough to have recently led conservative economist Alan Greenspan to categorize the troubles of some thrifts as "potentially very dangerous."
What is clearly needed is greater across- the-board cooperation between federal and state authorities, and among thrift officials. Whether that sense of urgency yet exists can be seriously questioned, given the decision of the Reagan administration late last week to oppose efforts to expand the emergency powers which federal banking regulators have in dealing with banking problems.
The decision, in fact, seems to have reversed earlier pronouncements by Treasury Secretary Donald Regan that the administration would assist the thrift industry. "We're going to be standing on the dock with a life preserver," Mr. Regan was quoted as saying of federal support for the industry. Now administration officials seem to be somewhat minimizing the problems of the thrifts, arguing that the administration's efforts to lower inflation should eventually bring down interest rates and thus help the industry.
Without at this point addressing the specifics of the emergency legislation, about which there is considerable disagreement by bankers themselves, suffice it to say that for its part the Reagan administration has an obligation to keep a wary eye on the thrift industry to ensure that it continues to fill a vital banking role in the US economy.
Some innovative steps by the industry and government are already underway. Thrifts are offering new variable rate mortgages, as well as a number of new banking services that should help attract depositors and boost profits. Federal regulators are allowing mergers of thrifts across state lines.
To spur deposits the industry is pressing Congress for a new tax-exempt savings certificate that would be linked to one-year Treasury bonds. The amounts (up to $1,000 in tax- free interest for single persons, $2,000 on joint returns) are modest enough not to entail a huge loss to the Treasury in tax revenues, and should be seriously considered by lawmakers.
All such efforts are salutary. The US thrift industry, the main supplier of home mortgage funds, is a precious national asset in its own right. Its current plight must not be overlooked in the resolution of more general econom ic affairs.
