The aftershocks from the temporary closing of 71 state-insured savings and loan institutions (S&Ls) in Ohio will reverberate nationally, analysts say. The effects could include potential withdrawals from privately insured banks and thrift institutions in other states, greater resistance to further deregulation of the banking industry, slightly less flexibility for Federal Reserve monetary policymak- ers, and added pressure for additional regulation of the government securities market.
The turmoil in Ohio is not expected to have any impact on savers with federally insured accounts.
Ohio's bank holiday began last Friday and was extended for another two days on Monday while the state legislature worked on a plan to allow privately insured institutions to reopen in a strengthened position. The closed institutions were insured by the state-chartered but industry-owned Ohio Deposit Guarantee Fund.
Gov. Richard Celeste's order closing privately insured financial institutions came in the wake of a run March 7 and 8 at Home State Savings Bank of Cincinnati. Savers lined up to withdraw their funds after hearing that Home State had lost up to $150 million in dealings with a now-bankrupt government securities firm, E.S.M. Government Securities Inc. Home State's officers closed its doors and put the bank up for sale the next week.
Losses from the collapse of Home State appeared to wipe out all the assets of the state-chartered insurance fund. As a result, Ohio residents began lining up to make withdrawals at other thrifts which did not have federal deposit insurance.
That prompted Governor Celeste last Friday to declare what originally was a three-day bank holiday, the most extensive since President Franklin Roosevelt shut all the nation's banks in 1933.
The holiday was extended while the state legislature Monday considered a plan that would require each closed institution to apply for federal insurance as a condition for reopening. An institution could reopen as soon as the state savings and loan superintendent found it qualified for federal insurance.
Celeste said he hoped some thrifts could open in ``days, rather than weeks.'' The closings are causing considerable hardship for citizens with all their funds tied up in shuttered S&Ls.
Experts say the turmoil in Ohio:
Poses no threat to savers with funds at federally insured banks and thrifts, which have the implicit backing of the US Treasury.
Large reserve funds are held by both the Federal Savings and Loan Insurance Corporation (FSLIC), which insures S&Ls, and the Federal Deposit Insurance Corp (FDIC) which insures banks. And ``Congress would make good'' any potential shortfall in those insurance funds, notes a banking industry analyst at a major brokerage firm, who asked not to be named.
Will not necessarily cause problems in other states -- including Pennsylvania, Maryland, Massachusetts, and North Carolina -- with state-insured thrifts. The state plans vary widely, analysts note, but several have larger reserve funds in relation to the size of deposits covered than does the Ohio fund.
Analysts caution that a prolonged crisis in Ohio might upset depositors at privately insured institutions elsewhere, perhaps triggering other runs. ``A lot of depositors could get nervous,'' says Brent Erensel, vice-president and regional banking analyst at Dean Witter Reynolds Inc.
None of the state funds is backed by a state government's full financial resources, experts say.
Highlights the unregulated nature of the government securities market and may lead to greater pressure for regulation of trading in government obligations.
The failure of E.S.M. has hit several cities as well as the Ohio banking community. Toledo, Ohio, stands to lose up to $19 million in the collapse of E.S.M., and Beaumont, Texas, could lose up to $20 million, one-fifth of its annual budget. House Banking Committee hearings are slated Friday on the New York Federal Reserve Bank's plan to set new capital adequacy guidelines for government security firms.
Illustrates the risks that are present in a banking system which has been partly deregulated by the federal government. Analysts stress, however, that the problems at Home State appear to be related more to mismanagement than to the pressures of competing in a deregulated banking environment.
Still the crisis in Ohio ``could be the catalyst that prompts some legislation in Congress'' to slow deregulation, Mr. Erensel says.
Make the Federal Reserve a bit more cautious in its management of credit conditions.
Some Fed watchers had been expecting the nation's central bank to try to tighten credit conditions a bit to halt a rapid increase in the money supply. Others saw no need for a change in Fed policy. Analysts now think the Fed will be careful not to rock boat until the Ohio bank situation is resolved. ``This may cause them to ease a little bit,'' says David Berson, a Fed watcher at Wharton Econometric Forecasting Associates.