Thrifts protest FDIC's change in insurance

Remember the quarter- point interest-rate advantage thrifts had over banks on savings accounts in the 1960s and '70s? That could be reversed later this year with banks touting a higher rate, as a result of planned cuts in deposit insurance premiums.

"Whether banks will take full advantage of it is still to be seen," said Jeff Meser, financial vice president of Great Midwest Bank, a Brookfield savings and loan. But a drop in the cost of insuring savings accounts is planned, allowing banks to raise rates.

Banks will begin paying 19 cents less than savings and loans 4 cents vs. 23 cents, on average to the Federal Deposit Insurance Corp. as early as July, unless Congress steps in to change the regulation.

The disparity, which is causing an uproar in the financial community, is actually a question of who should continue paying for the bailout of failed thrifts in the 1980s. Eleven cents of the thrift's larger insurance premium goes to that.

In testimony before the FDIC last week in Washington, D.C., Michael T. Crowley, president and chief executive officer of Mutual Savings Bank in Milwaukee, warned that the proposed split in the insurance rate has "created yet another looming crisis" that may "actually be jeopardizing the future viability" of the insurance fund.

"Institutions will change charters, corporate structures, become mortgage banking companies or just plain go out of business if they are forced to bear this unreasonable and undeserved burden," he said. That would leave fewer, weaker thrifts to shoulder the burden of the larger insurance cost, he added.

Bankers are split on the urgency of the problem. John C. Bruss, chairman of Fortress Bancshares Inc., Hartland, which operates small banks in Westby, Wis., and Houston, Minn., said: "As repugnant as it may sound to my friends in the thrift industry, the handwriting is on the wall: This is the death knell for the thrift industry."

But others don't believe that and worry that their insurance funds might be merged with those of savings and loans. "The banking industry is strongly opposed to being handed a bill for $10 billion to solve a problem it did not create," an American Bankers Association statement says.

Bankers say they lived with an interest-rate disadvantage for years.

"This idea that it's going to destroy them, I don't follow that," said Michael A. Hatfield, senior vice president and secretary of Marshall & Ilsley Corp.

Great Western Financial Corp., in Los Angeles, became the first thrift in the country to apply for a bank charter on March 1. One savings and loan doing business in Wisconsin, TCF Financial Corp., based in Minneapolis, announced last week that it was following suit to avoid being placed at a competitive disadvantage to banks.

First Financial Corp., Stevens Point, is investigating similar moves.

If approved for a bank charter, a thrift such as TCF could operate as both a bank and a savings and loan and lure its own customers from one teller window to the next to take advantage of higher paying accounts offered by its bank side.

"Either Congress will step in and resolve this or the industry will use whatever method available to get themselves out from under," said Harold Lee, Wisconsin savings and loan commissioner. "They are not going to allow this to be shoved down their throats."

Several factors will slow the movement of thrifts toward bank charters, such as the cost of obtaining the charter and possible exit fees from the thrift insurance fund. By far the biggest stumbling block, however, is a tax advantage that thrifts have enjoyed since 1962, according to savings and loan executives.

To help encourage home ownership and home lending, Congress allowed savings and loans to set aside artificially large reserves for bad loan losses. Depending on how well their loan portfolios have done over time, many thrifts have sizable bad debt reserves on which taxes would come due if they switched over completely to a banking charter.

Thus, savings and loans elsewhere that have sought banking charters plan to run both institutions under one roof and possibly avoid the tax bite. Thrifts in Milwaukee are looking into their options, Crowley said, and "want to see how well it works before they jump."

Thrifts lost their quarter- point advantage when interest rates were deregulated in the 1980s. How would they respond to a similar disadvantage in the future?

"We could eat the difference," according to Great Midwest's Meser. "Any institution has the ability to pay exorbitant rates. For awhile."

Copyright 1995
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