Bank run jars confidence in U.S. system

Press, 26 May 1984, Page 23

Bank run jars confidence in U.S. system

NZPA-Reuter New York The United States banking system, after last week’s run on the Continental Illinois National Bank and Trust Company, has been hit by an erosion of confidence the likes of which has not been seen in decades, analysts and regulators say. A spokesman for the United States Comptroller of the Currency in Washington said, “It certainly is true that certain institutions have lost a lot of market confidence.” A banking analyst said, “After a Continental, the question always becomes who else is out there. Any bank’s key asset is confidence.” Stocks of American banks fell sharply on the New

York Stock Exchange on Thursday, with Manufacturers ' Hanover down 5U52.25 to $28.75, and Chase Manhatten Corporation down $2.75 to $39. Continental Illinois shares were down 37Vzc to SUSB. The American dollar fell sharply against the German mark on rumours of funding problems at several banks. While analysts agreed that chances of a major money-centre bank failure were slim, the run on deposits at Continental showed how vulnerable the banking system was to rumours. Analysts said large depositors overseas and in the United States failed to roll over funds and withdrew fearing large losses if Continental collapsed.

Industry observers said that the problems at Continental and at other moneycentre banks whose stocks fell on Thursday were not new. Ellen Stockdale, a spokesperson for the Comptroller of the Currency, said, “People have known about Continental's problems all along. Then whop!” The Comptroller’s Office had been attempting to avert crises of confidence by forcing banks to disclose more information about their operations, she said. Late last year, the Comptrollers Office began a “Concentration of Industry” programme aimed at forcing banks that had 50 or 80 per cent of their loan portfolio to a single industry or related industries to in-

crease their loan-loss reserves. Ms Stockdale said that uneasiness about the banking industry had also been fostered by an increase in bank failures. In 1983, there were 48 bank failures, the most since 1939. So far this year, 32 banks have failed, threatening an even higher level for 1984. Still, Ms Stockdale said, the rate of failures, about 0.3 per cent, was very low when compared with bankruptcies in other industries. However, analysts said that there were concerns about the banking industry that were unlikely to disappear soon. In particular several key moneycentre banks had large amounts of non-performing or past-due loans to bor-

rowers in Latin America. (The exposure of American banks to foreign countries totalled $U5359.31 billion as of last December, according to a survey of 209 United States banking organisations released by the Federal Reserve Board, this week.) Rothschild’s Berman said that the sharp rise in interest rates over the last two months made the quality of those loans more questionable, since most borrowers had to pay a spread over the American prime lending rate. The Continental Illinois is actively pursuing a plan to transfer bad assets to a separate company and then seek investors to provide fresh capital for the existing bank, the “Washington Post” reports.

The newspaper said Continental’s chairman, Mr David Taylor, confirmed that the bank had been seeking such an option for months, and he hoped such a step would make it unnecessary for Continental to merge with another bank. The “Post” quoted Mr Taylor as saying in an interview that the bank's reputation and credibility were at such a low ebb that even after such a shift of assets, depositors might not believe its remaining assets were all healthy. He said such an attitude would make it difficult to find depositors for the bank regardless of its soundness. Mr Taylor, in a statement on Wednesday said that the rescue operation had begun to calm money markets and that big Tokyo banks that

were major lenders to Continental previously had now begun to return. He said European depositors had not yet begun to flock back but the tone of the market there seemed to be improving. Mr Taylor also said the bank was selling newly issued certificates of deposit again in the United States, “although not in copious quantities." and was paying about a quarter of a 'percentage point more than other major banks. He said the bank was still borrowing from the Federal Reserve system but less than last week when daily borrowings reached SUS 4 billion. Mr Taylor said the bank is now relying more on a SUSS.S billion line of credit it obtained as part of the rescue package.