Regulators to decide deposit insurance issue.

Decision holds serious consequences for thrifts

Los Angeles-area home buyers could have a much harder time obtaining mortgage loans if the Federal Deposit Insurance Corp. formally imposes its proposal to drastically reduce banks' deposit insurance premiums, local thrift officials warned.

But local bank officials countered that the exact opposite is true - such a decision could be a boon to home buyers in L.A. County and nationwide, they insisted.

The upcoming FDIC ruling on insurance premiums, which banks and thrifts pay to insure their customers' deposits can be paid back in the event the institution becomes insolvent, is the most hotly contested issue in the finance industry. It has already led three L.A. County thrift companies - Irwindale-based Home Savings of America, Chatsworth-based Great Western Financial Corp. and Los Angeles-based California Federal Bank - to apply for charters allowing them to open state and national banks.

In the end, the decision might seriously affect the ability of thrifts to compete with banks and would likely create shifts in the makeup of the banking industry

Rooted in crisis.

The ultimate effect of all this on consumers remains extremely unclear. While thrift officials insisted consumers would be harmed and bank officials said consumers would be helped, most independent industry observers said consumers probably would not notice any difference in services or fees, regardless of what decision the FDIC ultimately renders.

The hullabaloo over insurance premiums was actually born in 1989, in the midst of the savings and loan crisis. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) created a new FDIC-administered insurance fund for thrifts, called the Savings Association Insurance Fund, or SAIF. Before FIRREA, thrifts were insured through the now-defunct Federal Savings and Loan Insurance Corp.

FIRREA also created a new fund for banks called the Bank Insurance Fund, or BIF. Both BIF and SAIF are administered by the FDIC.

Since 1993, banks and thrifts have been assessed nearly identical premium payments for their separate insurance funds, averaging 23 cents per $100 in deposits for banks and 24 cents per $100 for S&Ls. Premium payments for both banks and thrifts are based on a risk-based scale, with the riskiest institutions paying up to 31 cents per $100 in deposits and the least-risky paying 23 cents.

The improved health of most thrifts is evident by noting that the thrift industry's average premium is 24 cents per $100 in deposits, just one cent more than the premium paid by the least-risky institutions.

Meanwhile, banks have become so stable in recent years that 91 percent of them pay the lowest possible premium, according to the FDIC.

Fund disparity

A disparity developed in the size of the separate funds because thrifts have been held legally responsible to pay the interest on bonds issued by the Financing Corp., also known as FICO, the federal agency created to resolve the S&L crisis by selling bonds intended to recapitalize the FSLIC. About 44 percent of the insurance premium dollars thrills have paid into SAIF have been diverted to FICO for this purpose, meaning that SAIF has grown much more slowly than the BIF.

Federal law requires that both the BIF and the SAIF must be recapitalized to 1.25 percent of insured deposits. Once the funds are capitalized, federal statutes require that insurance premiums be lowered to a level that maintains the 1.25 percent balance. The BIF is expected to reach its capitalization threshold this month, while the FDIC projects that, at current rates, the SAIF won't capitalize until the year 2002.

Last January, the FDIC proposed reducing insurance premiums for banks to an average of 4 cents per $100 in deposits once the BIF is capitalized. S&Ls, however, would be forced to continue paying current rates. The final decision by the FDIC on the issue was expected in May, but FDIC officials now say they are uncertain when the ruling will be made.

Competitive implications

S&L executives said the contemplated premium disparity would put S&Ls at a major competitive disadvantage to banks. Great Western, the second-largest thrift company in the nation, responded in early March by filing an application with the Office of the Comptroller of the Currency to become a national bank holding company. It would continue to operate as an S&L, but thrift customers would be encouraged through financial incentives to switch their deposits over to the bank side, according to Great Western's Senior Vice President Ian Campbell. This would massively reduce Great Western's deposit insurance premium.

This strategy is necessary because there is a federal moratorium on out-and-out conversion of thrifts into banks, Campbell said. If the charter is approved, Great Western would probably begin supplying most of its loans from the banking side, once customers had switched their deposits over.

H.F. Ahmanson & Co., parent of Home Savings, the nation's biggest thrift, quickly followed Great Western's lead, as did California Federal. David Barr, a spokesman with the FDIC, said 12 thrifts from around the country, including Great Western and CalFed, have applied with the agency for a change to BIF insurance. Ahmanson is applying for a charter to establish a state savings bank, so it has filed with regulators in the state of California and plans to apply later to federal agencies, according to spokeswoman Mary Trigg.

Fleeing deposits

Campbell of Great Western, who said the best solution to the mess is for Congress to merge the BIF and the SAIF - an option abhorrent to bankers - said that lowering insurance premiums for banks but not for thrifts would force thrifts to eliminate their deposit base.

Many thrifts would simply become mortgage bankers, he said, while others would adopt banking operations similar to the one proposed by Great Western. These moves, though, would have the effect of ensuring that the SAIF never becomes capitalized, and would make thrifts even riskier operations by destroying their deposit base, Campbell said. That was what led to the S&L crisis to begin with, he added.

"Failing to deal with the problem only raises the possibility that we'll see another version of the S&L crisis, and the taxpayers will be on the hook again," Campbell said. "This is a test to see how much we learned in the crisis of the 1980s."

Campbell said he believes home buyers would have a tougher time getting loans if the FDIC plan is adopted because thrifts would no. longer be able to offer lower interest rates than banks.

Bankers, however, disagreed. Dominick Albano, a spokesman for the California Bankers Association, a San Francisco-based trade group, said the FDIC plan would allow banks to offer better rates on home mortgage loans, thus increasing competition between banks and S&Ls and ultimately benefiting consumers.

"Consumers would see more of a bidding war, as far as interest rates are concerned," Albano said.

Industry observers such as Bill Browning, director of the Southern California financial services industry practice at the Los Angeles office of Arthur Andersen & Co., said the FDIC's decision probably won't affect consumers greatly, because banks and thrifts already offer many of the same services.

"This is a huge issue for banks and thrifts, but for consumers it's simply too far under the surface for most of them to care about," said Charlotte Chamberlain, an analyst with Wedbush Morgan Securities in Los Angeles.