Jumat, 20 Juni 2008

Banking And Finance (1)

Archives consist of articles that originally appeared in Collier's Year Book (for events of 1997 and earlier) or as monthly updates in Encarta Yearbook (for events of 1998 and later). Because they were published shortly after events occurred, they reflect the information available at that time. Cross references refer to Archive articles of the same year.
1993: Banking And Finance
Historically low interest rates in 1993 helped the U.S. banking industry achieve record profits and provided an escape hatch for debt-laden consumers. Rates on 30-year mortgage loans fell to under 7 percent, the lowest since the 1960s.
There was a downside to the good news, however. Congress appeared unable to pass legislation needed to modernize the banking industry, possibly setting the stage for a round of industry consolidation and failures later in the decade. And low yields drove savers who usually relied on bank accounts backed by government guarantees into riskier instruments such as mutual funds in order to maintain adequate returns. Returns on six-month certificates of deposit dropped below 3 percent. Five-year CD rates fell below 4.5 percent in October. Meanwhile, the assets of stock mutual funds rose 22 percent during the first half of the year, to $580.4 billion, and bond fund assets were up 16 percent, to $673.1 billion.
Defendants in various banking scandals made news again during the year, including Clark Clifford and Robert Altman, both of whom had been charged in 1992 in connection with the Bank of Credit and Commerce International (BCCI) case.
In Europe the year saw many banks beleaguered by credit problems and the effects of recession.
Prime Rate.
Slow economic growth kept interest rates in the United States at their lowest levels since the 1950s. On October 18, Morgan Guaranty Trust Company cut its prime rate, the rate it charges to its best customers, to 5.5 percent, down half a percentage point. A Morgan spokesman said the bank decided on the hefty cut because there was growth in loan demand, low inflation, and a spread of three percentage points between the Federal Reserve Board funds rate (the rate at which banks can borrow money overnight) and the prime — a very big spread by historical standards. Analysts had been expecting banks to cut the prime rate, which had lingered at 6 percent since July 1992, but only by a quarter of a percent. A brief sell-off of bank stocks followed Morgan's action, as analysts predicted a drop in bank profits because of lower rates on loans. However, most of the rest of the banking community declined to follow Morgan's lead.
Bank Profits.
Overall, the more than 11,000 commercial banks in the United States enjoyed a banner year in 1993. The industry reported $10.4 billion in earnings during the second quarter, just $455 million below the record earnings of the first quarter. The third quarter saw a new record as earnings reached $11.5 billion. For the first nine months of 1993 banks earned $32.6 billion, $8.5 billion more than in the corresponding period in 1992. Citicorp, the largest U.S. banking company, saw its third-quarter earnings triple to $528 million, a remarkable performance for a bank believed to have been on the Federal Deposit Insurance Corporation's list of troubled banks in 1991.
As a result of the strong earnings bank stocks generally outpaced the market, and shareholders saw dividends in the first half of the year mount to $8.7 billion, 50 percent more than in the same period of 1992.
Federal Deposit Insurance Fund.
The surge in profits reduced strains on the Federal Deposit Insurance Corporation's Bank Insurance Fund. In August 1993 the fund reported a balance of $6.8 billion and a reserve ratio of 35 cents for every $100 of insured deposits. At the end of 1992 the fund had reached negative $100 million. In addition, during 1993 the FDIC was able to repay the U.S. Treasury a $2.5 billion line of credit it had requested in 1991, when the outlook for banks was far more dismal.
Many banks that had been in danger of failing recovered because of the low interest rates. By December 15, 1993, 42 banks with $3.8 billion in assets had failed, compared to 120 banks with $44.2 billion in assets the previous year. The number of troubled banks was down by 125 in the third quarter of 1993, for a total of 664. The FDIC estimated total costs to the fund for the year at $500 million, compared to $7 billion in 1991 and $4.7 billion in 1992. Total assets at problem banks dropped by $75 billion in the first nine months of 1993, to $379 billion.
Because of the turnaround the FDIC estimated that it would reach its congressionally mandated reserve ratio of $1.25 for each $100 in deposits as early as 1996. Earlier estimates had the fund reaching the required level in 2002.
Consumer Debt.
The low interest rates also enabled consumers to strengthen their balance sheets. With rates for 30-year mortgages under 7 percent for the first time in nearly 25 years, many people refinanced mortgage loans and used the savings to pay down more expensive debt. They also used home equity loans, with their tax-deductible interest rates, to replace other forms of borrowing. Data published by American Banker in June showed that credit card loans at commercial banks fell in 1992 for the first time since 1981. Total card loans outstanding fell 1.9 percent, to $136.4 billion. Mortgage loans rose 8.2 percent, to $390.1 billion, and home equity loans rose by 4.3 percent, to $73.3 billion.
Credit Crunch.
Lawmakers, especially those from the depressed New England states, were angry that banks were not making more new loans in the face of record profits. They were especially disturbed by reports that small businesses in their states could not secure lines of credit. Banks blamed the situation on weak customer demand because of the soft economy, new sources of corporate financing, and burdensome laws passed by Congress in 1991 in reaction to a spate of bank failures. (These laws require banks to maintain very high levels of capital, thus reducing funds that would otherwise be available for loans.)
Surveys by the National Federation of Independent Business showed that borrowing by its 600,000 members was at a 20-year low because of concerns about the economy. As a result, President Bill Clinton announced a credit crunch initiative on March 10, when he introduced proposed new banking regulations meant to reduce paperwork and give bankers incentives to lend once again. Comptroller of the Currency Eugene A. Ludwig, regulator of national banks, established an appeals process for bankers unhappy with the grading of loans by federal bank examiners. Ludwig, the de facto head of the FDIC during 1993, also limited that agency's ability to examine banks regulated by the Office of the Comptroller of the Currency. This move, although unpopular with the FDIC, was praised by bankers, sometimes subjected to multiple examinations by federal regulators in a given year.

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