Bank Troubles Not Over Yet

AS federal regulators respond to the growing number of troubled New England banks and thrifts, politicians, bankers, and businessmen have charged they are choking off the region's credit supply. Analysts disagree on the validity of the charges, but most say credit is tight.

``The regulators have taken a harder, more conservative approach to New England,'' says James Moynihan Jr., managing director of Advest, Inc.'s Northeast bank stock division. ``As a result, lenders are not very generous.''

While there have been reports of businesses suddenly unable to get loans, and some companies have suffered, the available evidence suggests the crunch is more potential than real.

While not comparable to the banking collapse in Texas, the New England banking picture is nonetheless grim. So far in 1990, the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) have between them been forced to take control of 10 institutions in Massachusetts, Connecticut, New Hampshire, and Maine.

More failures are expected. In fact, the FDIC announced earlier this summer that it is opening a 400-employee bank liquidation field office south of Boston for all New England.

``I would say probably 12 to 18 banks are under very close regulatory scrutiny,'' Mr. Moynihan says. ``Probably half of them won't be with us in the next 12 months.''

Gerard Cassidy, executive vice president of the brokerage firm, Tucker Anthony, is more pessimistic. He estimates up to 36 banks and thrifts in the Northeast will go belly up before the economy improves. ``It's a matter of time before these things are shut down,'' he says.

Federal bank examiners have responded with strict audits, often requiring banks to lower the value of assets on the books, and classifying as nonperforming loans some in which borrowers have never missed a payment - so-called ``performing-nonperforming'' loans. The economic hard times, regulatory zeal, and US international commitments to increase bank capitalization have resulted in a tightening of credit throughout the region.

Moynihan cites one example of the phenomenon. An area bank had a 10-year-old loan in Buffalo, N.Y., for an office building owned by a group of lawyers. While the principal and interest were always paid on time, the building's cash flow did not cover the loan payments, so the lawyers were paying the difference out of their own pockets. The regulators reclassified this as a performing-nonperforming loan.

A banker writing in the June/July issue of the newsletter ``Massachusetts Banker'' says his bank had a 20 percent equity position in a condo conversion. Only 10 of the units sold, and the other 38 were rented out. The examiners determined that the property was worth $1.5 million on a rental basis instead of the $1.8 million at which the bank valued it.

``The regulators have come down extremely aggressively on the banks up here,'' Mr. Cassidy says. But, he adds, they are ``stuck in a tough position. In the mid-'80s, they were purposely lax in handling the crisis in the Southwest, ... and they have turned a molehill into a gigantic mountain. Now they come here and see a lot of the same signs that they saw in the early '80s down in the Southwest, and they don't want to have another mountain.''

James McFarland, an FDIC assistant regional director in Boston, denies that regulators have dried up credit. ``There has been some unnecessary contraction,'' he says. But bankers he has talked with say some of the contraction was ``inevitable. Loans are available, but not under the same terms they were two years ago.''

Mr. McFarland says that the performing-nonperforming loan category is an accounting category that has existed since 1986. ``The reason it's surfacing a lot more is because property values are declining,'' he says.

Associated Industries of Massachusetts (AIM), which represents some 3,000 Bay State companies, says ``several dozen'' member firms were concerned about credit during the first few months of the year.

``We had a number of opportunities to interface with the regulators and other banking officials,'' says Brian Gilmore, AIM's senior vice president. Since then, ``we are not aware of any of our member companies currently having new problems due to lack of credit.''

The Massachusetts Bankers Association takes a neutral position. ``Regulation of banks is very, very important. That's part of the problem in the Southwest - banks and S&Ls were not regulated well enough,'' says Robert Fichter, the association's vice president for public affairs. ``We are very concerned that the regulators not arbitrarily be bashed....''

Mr. Fichter cautions, however, that if regulators read the economic situation incorrectly and take excessive measures, they could indeed make the economic downturn much worse.

In an effort to investigate whether examiners were judging New England banks too harshly, the association commissioned a report by Dennis Aronowitz, a Boston University law professor. Dr. Aronowitz finds no ``hard facts'' proving examiners have changed their approach. He writes, however, that ``no satisfactory mechanism exists for resolving the conflicting claims about what is actually taking place.''

Bankers who disagree with regulators about reclassification of loans and assets can, in theory, appeal to the regulators' superiors or go to federal court. But Aronowitz finds both options unattractive to bankers for a variety of reasons.

Aronowitz proposes setting up an arbitration system to adjudicate such disputes. He believes the confidential review would ``create an advisory process that would not be legally binding, but, by virtue of its integrity, would be respected by the industry and the regulators.''

The regional economic slowdown, which most economists now call a recession, has left few financial institutions untouched. Most of the institutions that have failed to date are in the small to medium category - with up to $500 million in assets. But one, Home Owners Savings Bank of Burlington, Mass. - seized last spring by the OTS - had $3.6 billion in assets.

The giant Bank of Boston managed to eke out a $4 million profit in the second quarter of 1990, but that was down 96 percent from the previous year. BayBanks recently cut its dividend for the first time after 31 years of growth, following announcement of a $25.3 million loss in the first half of the year.

And all eyes continue to watch the struggling Bank of New England Corporation (BNE), as it fights to stay afloat (see box, left).

While predictions vary, many analysts believe the region's economy will not improve until at least the middle of 1991 or 1992. Even then, they say, the recovery will be gradual. The increase in world oil prices following the Iraqi invasion of Kuwait may well complicate matters, however, since New England is the US region most dependent on oil.

The difficulties facing New England banks and thrifts are a result of the economic boom of the 1980s. In a study for the Massachusetts Bankers Association, Wellesley College economics professor Karl Case explains that real estate prices skyrocketed between 1983 and 1986, as the median price of a house rose from $82,600 to $177,000. Developers raced to build houses, he says, and when the downturn came, were stuck with large numbers of unsold properties. Many builders defaulted, saddling banks with large numbers of nonperforming loans.

Moynihan estimates that New England thrifts' nonperforming assets currently constitute 6 percent of total assets, while for banks the figure is 5 percent. The ``normal'' figure is 1 percent or less, he says.