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What crisis? What do Indiana bankers think about Indiana banking, banking reform and paying for the sins of others?

What do Indiana bankers think about the state of the banking industry and bank reform? They are generally upbeat, but they want to be sure the playing field is level.

There is a banking crisis brewing on a national level, but Indiana banks do not have the problems of those in New England, the Southwest or other regions that are associated with Third World debt, oil or real-estate problems. Clearly, Indiana banks are healthier, more stable and fairly well capitalized. The Bush administration's 650-page proposal for reform, the most sweeping since 1933, recognizes the existence of the national problems. Here are some highlights:

Insured deposits: The reform plan would set a limit of $100,000 per person per institution, and study an overall cap of $100,000 per individual.

Too big to fail: Regulators would be discouraged from fully reimbursing uninsured deposits with Federal Deposit Insurance Corp. funds. The Federal Reserve System would cover the balance.

Bank ownership: Commercial and industrial companies would be permitted to own holding companies that own banks. "Firewalls" would protect bank assets and deposits.

Bank activities: For the first time since 1933, bank holding companies would be allowed to own subsidiaries that underwrite and sell securities and insurance.

Interstate banking: Within three years, bank holding companies could expand into any state. States would be barred from discouraging out-of-state banks from establishing branches.

Indiana's sound banking has not been unscathed by industry problems. FDIC premiums have almost tripled in nine years, from 7.69 cents per $100 in deposits in 1982 to 19.5 cents today. The premiums will hit 23 cents in July.

Also, Indiana bank stocks have suffered because of industry or regional issues that don't really affect Indiana. The downside is that capitalization constraints have precluded real growth, including acquisitions. The upside is that, fundamentally, many Indiana bank stocks are attractive buys.

Indiana Business Magazine interviewed bankers throughout the state to discuss problems of the industry, Indiana's banking health and proposals for reform.

David Givens, president, INB Financial

Corp., Indianapolis

"Expanded powers must come. The United States does not have one bank in the top 20. Citibank dropped off the list this year. Competing international banks have far-reaching powers. We should do away with artificial boundaries and allow acquisitions and branching throughout the country. Our economy needs big banks. There are more banks in the U.S. than there are in the world.

"We need strong, consistent and competent regulators that stick to it. Announce policies, then examine banks to make sure they are in compliance."

Joseph D. Barnette Jr.,

president and CEO, Banc

One Indiana Corp., Indianapolis

"We are for free enterprise and free and open competition. It's a small world. All kinds of banks and non-banks are in Indiana, many without brick and mortar and not regulated geographically. This includes credit cards, auto loans and mortgages from companies such as Sears, AT&T and GMAC. All should be able to offer products and services anywhere. Bank One can go with credit cards and other services, but we are under different regulations than the non-banking competitors.

"(Reform) issues have come up for years, and it has been fragmented with the big bank-little bank approach. There is room for independent banks to carve out a niche and not compete head-on with a Citicorp. We must be able to compete nationally and internationally."

James W. Magee, president and

CEO, Merchants National Bank &

Trust Co., Indianapolis

"There are problems in Indiana banks but they are minimal relative to other parts of the country. Real-estate loan problems have surfaced in several of the larger Indiana banks but the banks have been able to take healthy loan loss provisions from earnings and still operate at a profit.

"I believe that in the near term the important items to be reviewed and redone are bank supervision, insurance reform and geographic expansion. All need to be restructured quickly. Indiana banks have a good future as our business climate has changed dramatically during the 1980s. We will see a further consolidation of banks."

Richard T. Doermer, chairman

and CEO, Summcorp, Fort Wayne

"Indiana banks have clearly been affected in an indirect way because of the increase in FDIC premiums. Directly, because of big bank problems that are causing the administration to revamp the industry. I have serious reservations on the proposal to change FDIC coverage. I think it is an incredible error to limit to $100,000 per person. People are apprehensive of the $100,000 limit, they will worry and take excesses out. The bank asset base will be reduced, and it will have an adverse effect on credit supply. Money will move to money funds that don't lend to the little guy. I think it is a mistake to solve the problem this way."

Regarding interstate and national banking: "The U.S. was built on fragmented banking. We have not starved for credit because it has been provided. The call to compete with international banks is unfair because we are not the same; Japanese, French and German banks are a mix of Citicorp and Merrill Lynch. Our social policy does not permit that concentration of economic power."

Bruce L. Dahltorp, president and

CEO, Gainer Bank, Merrillville

Regarding increases in FDIC premiums: "I am upset that good banks are paying for poorly managed banks. Premiums should be on risk-based capital. Banks that are healthy and with good earnings should be rewarded with lower premiums. Banks that are not healthy and which don't have good capital positions should pay higher premiums. If higher premiums help cause a downfall, then let them fail. I was appalled that for the Bank of New England, all accounts were bailed out.

"Interstate banking will offer consumers more competition and products. The good regional banks will move first. In 20 years, the number of banks will consolidate from 14,000 to 5,000 in the country. You will see the big 'one-stop-shop' bank, but for niches, boutique banks will sprout up. Where there are needs, banks will respond."

Robert J. DeLaney, chairman,

president and CEO, Lincoln National

Bank & Trust Co., Fort Wayne

"I have no strong disagreement with any of the proposals. The $100,000 limit has an impact on community banks, though. I think customers should be allowed to pay a premium for additional accounts, either through FDIC or private account coverage.

"The continued increases in FDIC premiums will hurt the good banks and have a multiplier effect. The 'too big to fail' doctrine is definitely unfair when poorly run big banks get bailed out.

"The banking industry will not fail. The exuberance of the 1980s will take time to work through the system. Real-estate problems will be cured, but not overnight. Earnings will suffer because of it, but in the long term, bank stocks are a good investment."

Christopher J. Murphy III, president

and CEO, 1st Source Bank,

South Bend

"The deposit reform is way overdue. If national interest determines that there is systemic risk and the 'too big to fail' doctrine should prevail, then those banks should be segmented, pulled out of the FDIC and treated differently. Deposit insurance should go back to its original intent--to protect the savings of individuals. Banking is a local business and insurance should reflect that. FDIC premiums from banks should be risk-based."

Regarding bank ownership: "I do not have a problem with commerce owning banks, but it should go both ways, and banks should be able to buy industrial corporations. This could solve capital shortages through commerce contributions to capital. With ownership proposals and expanded services proposals, there should be large 'firewalls' around the banking subsidiaries."

Dan Mitchell, chairman, Old

National Bank, Evansville

"Deposit insurance reform is key. A real problem is the 'too big to fail' policy. The banking industry does not have enough money to save the world. Discipline must be brought back."

Regarding expanded powers: "I'd rather have them available than not have them. But I think it is a 'greener grass syndrome.' Some tie-ins make sense like insurance and brokerage sales. The largest banks are 'chomping at the bit' to underwrite securities, but look at what happened to Wall Street last year.

"I have no problem with $100,000 limits. The FDIC was set up to insure small depositors, not for investors."

The future will see "continued consolidation. We are possessed with overcapacity, and economic laws indicate a contraction in the number of institutions. With the reduction in numbers there will be some 'reforestation' because of sensitivities to customer needs."

Michael Gaffigan, president and

CEO, Mercantile National Bank of

Indiana, Hammond

"Legislation involving banking powers, deposit insurance reform and regulatory oversight will be addressed, hopefully, in the context of safety, soundness and the competitive position of our banks domestically.

"History has proven, over and over again, that there is always room in our markets for a well-managed, locally owned, well-capitalized independent bank."

Michael J. Alley, president, Fifth

Third Bank of Central Indiana

Regarding expanded powers: "We applaud efforts to reward well-run and prudent banks with additional privileges. Those with high capital and earnings would have the freedom to reach other markets and customers.

"Interstate banking will not have a significant impact on Indiana and adjacent states. We do not see a proliferation of Northeast banks and money-center banks coming to Indiana.

"Bank ownership by industrial companies is done in other countries, such as Japan, which has the largest banks in the world. We support it, but it needs to be done in a manner to maintain the integrity of banking capital. It should not be used as a captive financing tool for that company, and it should not intermingle assets."

Kip White, executive vice president,

Fountain Trust Co., Covington,

former president of Community

Bankers Association of Indiana

"Washington is trying to drive small community banks out of business. With their Wall Street mentality, they want to reduce the number of banks dramatically, and make big banks bigger, into megabanks. They don't have an appreciation for the role of community banks.

"Better and tougher supervision must be taken early on. Healthy banks can't go on paying for big banks' stupidity and problems. The big banks get into foreign loans, big real-estate deals, leveraged buy-outs, whatever the latest fad is, till they get in trouble."

Regarding expanded powers and services: "Getting into new areas is not the way to work out problems. Get back to basics. And shore up balance sheets."
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Author:Gibbs, John R.
Publication:Indiana Business Magazine
Date:May 1, 1991
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