Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, February 21, 1991 TAG: 9102210125
SECTION: BUSINESS PAGE: B-7 EDITION: METRO
SOURCE: The Washington Post
DATELINE: NASHUA, N.H. LENGTH: Medium
Undersecretary of the Treasury Robert Glauber said the decision to ease some rules is part of a package of "technical and psychological changes" that are intended to ensure that the troubles of New England banks do not prevent the region from recovering from the recession.
Banks all across New England have been reeling as the region has been the hardest hit in the current economic downturn. The measures, however, will affect banks all across the country and have been the subject of a series of meetings among banking regulators designed to deal with the so-called "credit crunch."
"We are not going to be the whole solution" to the region's economic problems, Glauber cautioned four of the region's six governors, who gathered here for what was called a New England banking summit.
"What is clearly evident in New England is that the banking system is under stress. We have to fix the banking system and we have to fix it now," Glauber said."
In early January, the Federal Deposit Insurance Corp. took over the Bank of New England, the biggest victim so far of a banking disaster triggered by excessive real estate speculation.
Several dozen more New England banks are expected to fail in the next two years. The most serious problems are in New Hampshire, where the nation's first presidential primary is just a year away. Five of the state's eight largest banks are in such bad shape they may not last until election day.
New Hampshire Gov. Judd Gregg, chairman of the New England Governors' Conference, is urging federal regulators to use his state to experiment with new techniques to head off bank failures.
FDIC Chairman William Seidman said his agency hopes to find a way to avoid costly bank failures, but Seidman repeatedly refused to promise that New Hampshire banks would be given "open bank assistance" - a technique in which the government invests money in a weak bank to keep it from going broke.
Although the problems plaguing New England banks are virtually identical to those that devastated the banking systems of Texas, Oklahoma, Louisiana and Arizona over the past few years, regulators acknowledge they are planning to go farther than they did in the Southwest to deal with the problem.
Along with Glauber and Dean Marriott, deputy comptroller of the currency, Seidman stressed that regulators, however, will not resort to "forbearance," a strategy in which banking rules are simply not enforced because banks cannot comply with them. Nor will regulators permit "phony accounting" that will mask the true condition of banks, Seidman said.
But some of the accounting rules changes, outlined by the officials here Wednesday, will give banks significant breaks in handling problem loans and in some cases will allow them to convert bad loans into good.
One key change endorsed by the Treasury and regulators is called "loan splitting." For example, a real estate developer might borrow $1 million to build a shopping center and then find only half the stores can be rented, producing only half the cash needed to pay off the loan. Under present rules, the entire $1 million would be counted as a bad loan. "Loan splitting" would permit half to be reclassified as a good loan.
Another controversial change would do away with the rule that if a borrower has defaulted on one loan, all other loans to that borrower also must be considered troubled. That rule too, would benefit many real estate developers who are having trouble financing new projects because one of their ventures has gone bad.
A third key change would allow banks to ignore the current market price of real estate in deciding how much a property is worth. The market Wednesday is so depressed that prices do not reflect the true value of real estate, proponents of the change argue.
by CNB