Crisis Looming For Thrift Industry Gilkey Says Higher Premiums, Fewer Thrifts Could Trigger ‘Death Spiral’
A looming rollback in premiums for bank deposit insurance could seriously undermine the competitiveness and longterm viability of healthy savings and loan institutions like Sterling Savings Association, Chairman Harold Gilkey says.
If Congress does not take action this year, he said, a “death spiral” could impose an ever greater premium burden on fewer thrifts, eventually wiping out the industry.
“The crisis is staring them right in the face,” Gilkey said.
The General Accounting Office two weeks ago released a report sounding the same warning, as did the Office of Thrift Supervision in January.
But a spokeswoman for the American Bankers Association downplayed the threat, saying the thrift industry is more than strong enough to meet its obligations.
The Federal Deposit Insurance Corp. will hold a hearing on the issue Friday.
Gilkey is a member of an Association of Community Bankers panel that has also been urging action. The ACB is a thrift industry group.
All banks and thrifts now pay 24 cents per $100 in deposits to the Bank Insurance Fund and Savings Association Insurance Fund, both administered by the FDIC.
The funds are rebuilding insurance pools depleted by bank and thrift failures in the late 1980s and early 1990s. Government thrift bailouts cost taxpayers $150 billion.
Although the banking industry has rebounded strongly since then, thrifts have not. The Bank Insurance Fund is near $1.25 per $100 in deposits, the goal set by Congress in 1989.
The thrift fund has only 27 cents per $100 in deposits.
Thrifts have fallen behind because their deposit base has shrunk, Gilkey said, and half their premiums are used to pay interest on bonds issued by the Financial Corp. in a futile effort to shore up the old thrift insurance pool.
Gilkey said the deposit premium for banks will likely drop to just 4 cents per $100 later this year, while the premium for thrifts remains unchanged.
The result will be a damaging discrepancy in costs for institutions of similar size, he said.
For example, Sterling Savings and Washington Trust Bank, the largest Spokane-based financial institutions, each have almost $1 billion in deposits. If the bank premium is reduced, Sterling would pay about $1.6 million more for insurance annually than Washington Trust.
“I will be at a disadvantage,” Gilkey said. “It has nothing to do with the soundness of either institution.”
Weaker thrifts will likely be taken over by stronger institutions, either banks or thrifts, he said. Each merger will shift more premiums onto the remaining institutions, further eroding their competitive position.
“What will happen is, the thrifts will get smaller,” Gilkey said. “We’ll have to pay more for our capital.”
Some thrifts, he noted, are trying to avoid the squeeze by changing their charters. But to exit the thrift insurance pool, an institution must pay four times its annual premium, a sum few can afford, he said.
Gilkey said there are several potential solutions. The industry’s preference is consolidation of the bank and thrift pools.
Alternatives would include splitting the cost of retiring the bonds, using untapped Resolution Trust Corp. funds, maintaining slightly higher thrift premiums while the industry insurance pool refills, or a combination.
Doing nothing will result in a repeat of the earlier bailout, Gilkey said.
But ABA spokeswoman Charlotte Birch said Tuesday thrifts are using the impending premium differential to cover efforts to avoid as much of the burden as possible.
For example, she said, thrifts are relying more on draws from the Federal Home Loan Bank instead of deposits for loan funds.
Those institutions also enjoy tax advantages over banks, she added.
Birch said Congress can alleviate some of the problems with the thrift insurance fund by allowing premiums on thrift deposits purchased by banks to retire Financial Corp. bonds.
Also, she said, measures blocking conversion to another type of institution could be toughened.
“The solutions to the potential problems are quite simple,” she said. “It’s not an affordability issue.”