Cato Policy Analysis No. 149 February 12, 1991

Policy Analysis

Judging the 1991 Reform Effort:
Do U.S. Banks Have a Future?

by Catherine England

Catherine England is director of regulatory studies and senior editor of Regulation magazine at the Cato Institute.

Executive Summary

When President Bush signed into law the Financial In- stitutions Reform, Recovery and Enforcement Act (FIRREA) on August 9, 1989, he promised that the bailout legislation for savings and loans would "safeguard and stabilize America's financial system and put in place permanent reforms so these problems will never happen again." Less than 18 months lat- er, disturbing predictions of a possible crisis among U.S. banks have raised doubts about the administration's ability to deliver on its promise of "never again."

Although there is considerable disagreement about the state of the banking industry's health, there is enough un- settling news to cause many taxpayers to take notice. Bank failures increased dramatically during the 1980s. Between 1945 and 1980, bank failures averaged fewer than five per year. In only four of those years (1975, 1976, 1979, and 1980)did 10 or more banks fail. Between 1981 and 1989, however, the average annual number of bank failures jumped to 114.(1) The changes in the bank failure rate between 1955 and 1990 are illustrated in Figure 1. Credit quality represents a serious problem for a significant number of banks. Those industry trends become even more disturbing when they are coupled with newsmaking events such as the failure of the Bank of New England, Chase Manhattan's recent decision to cut 5,000 jobs while setting aside $850 million to cover bad loans, or the recent prediction by the Congressional Budget Office that the Bank Insurance Fund will become insolvent sometime in 1992. Year-end financial statements from the nation's banks will be examined with uncommon interest in the coming months, and the Federal Deposit Insurance Corpora- tion's reserve position will be watched closely in an effort to ascertain the insurance fund's financial health.

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