1 The Northeast includes the six New England states (Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, and

Connecticut) plus New York and New Jersey.

2 Throughout this chapter, banks refers to commercial banks and savings banks supervised by the FDIC, the Office of the

Comptroller of the Currency (OCC), or the Federal Reserve. Savings and loan associations supervised by the Federal Home

Loan Bank Board until 1989 and then by the Office of Thrift Supervision (OTS) are not included.

3 These ratios were calculated from assets at failure as a percentage of prior year-end state banking assets for all banks failed

and open.

Chapter 10

Banking Problems Banking Problems 

in the Northeast in the Northeast

Introduction

The banking problems in the Northeast were indissoluble from the regions real estate

problems.1 Fueled by a strong regional economy, both residential and commercial real estate markets in the region boomed during the 1980s, but the boom eventually led to overbuilding and rampant real estate speculation. Late in the decade, when the regional

economy weakened and a high volume of new construction projects coincided with diminished demand, the real estate market boom turned into a bust. During the early 1990s, an

oversupply of completed projects came on the market and real estate prices went into a

sharp decline. In an environment of increased real estate loan defaults, a significant number

of northeastern banks failed: 16 in 1990, 52 in 1991, and 43 in 1992.2 These failures accounted for substantial portions of the nations total volume of failed-bank assets and of the

FDICs bank-failure resolution costs for those years. Losses from northeastern bank failures

totaled $1.3 billion in 1990, $5.5 billion in 1991, and $2.8 billion in 1992and constituted

45 percent, 91 percent, and 77 percent, respectively, of total FDIC failure-resolution costs

for those years. Failures were particularly prominent in 1991, when assets of failed banks

represented 25.4 percent of prior year-end banking assets in New Hampshire, 18.3 percent

in Connecticut, 15.2 percent in Maine, and 12.0 percent in Massachusetts.3

The 1991 failure of three subsidiaries of the Bank of New England Corporation (the

Bank of New England, Connecticut Bank and Trust Co., and the Maine National Bank), a

failure which many would identify as the last major failure of the banking crises of the

1980s and early 1990s, was especially significant. The Bank of New Englands failure re-
An Examination of the Banking Crises of the 1980s and Early 1990s Volume I

338 History of the EightiesLessons for the Future

4 John W. Milligan, KKR, Member FDIC, Institutional Investor 25, no. 7 (June 1991): 59. 5 See Chapter 7, Continental Illinois and Too Big to Fail. 

sulted in the first use of the cross-guarantee provision of the Financial Institutions Reform,

Recovery and Enforcement Act of 1989 (FIRREA) to close an institution (Maine National

Bank). In addition, the participation of Kohlberg, Kravis, Roberts & Co. as a partner with

Fleet/Norstar in the acquisition of the three subsidiaries of the Bank of New England Corporation marked the first time that a nonbank financial buyer participated in the purchase

of a failed commercial bank. This companys involvement not only allowed capital to enter

the banking industry from nonbanking sources but was also expected to increase the number of potential bidders in future bank failures.4 Finally, the decision to protect all deposits

of the three subsidiaries of the Bank of New England Corporation again focused attention

on the too-big-to-fail bank disposition policy. Later in 1991, Congress included provisions in the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)

that made it more difficult to resolve bank failures in ways that would protect uninsured deposits.5

The problems of the northeastern banks arose to a large extent because they had been

aggressive participants in the prosperous real estate markets of the 1980s. Between 1983

and 1989 the median ratio of real estate loans to assets rose from approximately 25 percent

to 51 percent. Both residential and commercial real estate loans contributed to the increase,

but the increase in the median commercial real estate loan concentration is widely held to

have been a primary reason for the asset-quality problems and eventual failure of many of

the regions banks in the late 1980s and early 1990s; commercial real estate loan portfolios

as a percentage of bank assets rose from 6.5 percent in 1982 to 14 percent in 1989 and 1990.

Since real estate lending played such an important role in the expansion and collapse

of banks in the Northeast, the areas real estate markets of the 1980s are discussed in some

detail, with the focus first on New England and then on New York and New Jersey. The

chapter then provides an overview of bankings relationship to real estate in the region as a

whole and then specifically in New England and in New York and New Jersey. The two succeeding sections present and analyze data on bank performance in the region and on bank

failures by state. Finally, the rise and fall of the Bank of New England Corporation is recounted.

The Northeastern Economy and Real Estate

The Northeast recovered quickly from the 198182 national recession. Between the

end of the recession and 1988, the regions rate of change in gross product outperformed

that of the nation as a whole, and its commercial and residential real estate markets boomed,
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 339

fueled by the strong regional economy as well as by employment growth. But late in the

decadepartly because of a slowdown in the growth of military spending as the Cold War

came to an end, a decline in the computer industry in the Boston area, and cuts by Wall

Street firms after the stock market crash in October 1987the regional economy weakened. Employment fell, growth in personal income slowed, and from 1989 through 1992

the regions rate of change in gross product underperformed the nations (see figure 10.1). 

The weakening of the regional economy exacerbated the problems of the overbuilt

real estate markets, and these markets fell off dramatically. For example, the total value of

nonresidential construction permits in the region, having jumped from $4.4 billion in 1980

to $10.2 billion in 1988, then declined to $6.5 billion by 1991. And the number of newly issued permits for residential construction, after soaring 172 percent between 1982 and 1986,

plummeted by 67 percent between 1986 and 1991 (see table 10.1).

New England 

In 1988, when the New England economy began to weaken, many were caught by surprise. Until then New England had been one of the most prosperous areas of the country. Its

unemployment rate had fallen to 3 percent and its per capita income had climbed to 123 perSource: U.S. Department of Commerce, Bureau of Economic Analysis.

U.S.

Northeast

Figure 10.1

Changes in Northeast Gross Product versus

Changes in U.S. Gross Domestic Product,

1980–1994

1980 1982 1984 1986 1988 1990 1992 1994

-4

-2

0

2

4

6

8

Percent
An Examination of the Banking Crises of the 1980s and Early 1990s Volume I

340 History of the EightiesLessons for the Future

Table 10.1

Nonresidential and Residential Construction, 

Northeast Region, 19801994

Value of

Nonresidential Permits Number of Residential

Year ($Thousands) Permits Issued

1980 4,415,720 87,840

1981 5,415,443 85,502

1982 5,584,465 84,454

1983 5,273,951 130,848

1984 6,966,098 161,348

1985 8,988,867 216,146

1986 9,348,328 229,816

1987 10,049,755 216,992

1988 10,178,196 176,343

1989 9,915,156 133,473

1990 8,037,836 88,643

1991 6,510,983 75,173

1992 6,519,954 86,531

1993 7,448,605 93,395

1994 7,338,631 98,258

Source: Bureau of the Census (Building Permits Section, Manpower and Construction Statistics Branch).

6 This discussion is based on Lynn E. Browne, Why New England Went the Way of Texas Rather Than California, Federal

Reserve Bank of Boston New England Economic Review (January/February 1992): 24, 33.

cent of the national average, up from 106 percent in 1980.6 Yet despite many favorable aspects of New Englands economy, some signs of potential problems had been evident. In

the mid-1980s the computer industry, a regional specialty, had begun to confront a more

competitive environment, and New England firms had found themselves with products and

strategies that did not necessarily fit the changing marketplace. In addition, defense contractors in the region were facing the end of the Reagan defense buildup. Finally, the cost of

doing business in the region had escalated during the prosperous times, causing some manufacturers to move their operations to less-expensive parts of the country. Although none of

these factors had appeared to be especially harmful in itself and the resulting job losses in

any one year had not been particularly noteworthy, together they added up over time. For

example, between 1984 and 1988, manufacturing employment in New England declined by

140,000 jobs, or approximately 9 percent.

New Englands real estate markets turned down along with the economy, and the commercial real estate markets were hit particularly hard. The decline in the commercial mar-
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 341

Figure 10.2

Office Vacancy Rates in Boston,

1980–1994 Percent

1980 1982 1984 1986 1988 1990 1992 1994

0

5

10

15

20

Source: CB Commercial/Torto Wheaton Research, The Office Outlook (spring

1997), vol. 1.

7 Michael Weinstein, New England Banks Finance a Healthy Real Estate Market, American Banker (June 4, 1987), 12. 8 Browne, Why New England Went the Way of Texas, 25. 9 David Neustadt, Bank of Boston Acts to Stem Losses, American Banker (December 5, 1989), 6.

kets was surprising to the many who believed that development in New England had been

relatively cautious and that the region would not experience the problem of overbuilding

that had occurred in the Southwest. For example, the president of Fleet Real Estate Inc. in

Providence stated in June 1987 that the builders [around] Boston are not going hog-wild

like they did in Houston. The New England marketplace, I think, is a sensible market.7 Another reason the downturn was unexpected was that vacancy rates in New Englands major

office and industrial markets were not markedly different in 1988, at the end of the boom,

from what they had been in 1984, at its beginning (see figure 10.2).8 Nevertheless, as the

head of the Bank of Bostons structured real estate department noted late in 1989, Overbuilding has resulted in high vacancy rates and revenue shortfalls of 10% to 30% or more

for many projects.9

The deterioration in the New England commercial real estate markets was evidenced

by the 22 percent decline between 1988 and 1991 in the Torto Wheaton Rent Index for

Boston, and the 17 percent decline between 1990 and 1991 in the index for Hartford (see
An Examination of the Banking Crises of the 1980s and Early 1990s Volume I

342 History of the EightiesLessons for the Future

Hartford

U.S.

Boston

Figure 10.3

Rent Indices, Boston and Hartford versus U.S.,

1980–1995

Source: CB Commercial/Torto Wheaton Research, The Office Outlook (fall

1996), vol. 1.

1980 1982 1984 1986 1988 1990 1992 1994

8

12

16

20

Level ($)

10 The Torto Wheaton Rent Index is a statistically computed dollar value for a five-year, 10,000-square-foot lease for an existing high-rise building in the statistical average of the metro area. 11 Lynn E. Browne and Eric S. Rosengren, Real Estate and the Credit Crunch: An Overview, Federal Reserve Bank of

Boston New England Economic Review (November/December 1992): 28. 12 Information in this paragraph is derived from Paul Korzeniowski, Distress for Success, Metro Business, Danvers, MA

(October 1990), available: DIALOG, File: 635: Business Dateline.

figure 10.3).10 Nationally over both time periods, this index fell only about 1 percent. But

as dramatic as the rent index declines were, they probably did not reflect the full extent of

the collapse in New England real estate values. According to one contemporary study, if

commercial values at the end of 1992 had been based on then-current rental agreements and

occupancy rates, the value of the office stock in the Boston metropolitan area would appear

to have fallen more than 70 percent since 1987.11

The collapse of commercial real estate is further illustrated by the jump in the amount

of repossessed property in Massachusetts between year-end 1988 and year-end 1989, from

$339 million to $1.5 billion.12 In 1990, many real estate professionals believed that troubled

properties represented the fastest-growing segment of the Metropolitan Boston commercial

real estate market. These problems arose in part because the Massachusetts Miracle had

lured novice developersmany with weak business plans often based on little or poor market researchinto the real estate game. Some commercial projects were 100 percent fi-
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 343

13 Ibid. 14 Margot E. Jenks et al., New England Economic Summary, First Quarter 1990, Federal Reserve Bank of Boston New

England Economic Indicators (August 1990): ix. 15 Katherine Morrall, Weakening Northeast Real Estate Market Raises Concerns, Savings Institutions 111, no. 4 (April

1990): 13. 16 Korzeniowski, Distress for Success. 17 This paragraph is based largely on Tom Leander, New England Graveyard Tour: Here Lie Nonperforming Loans, American Banker (September 12, 1990), 1, 1617.

nanced and based on such unrealistic expectations as the continuation of 10 percent annual

price hikes into the 1990s. Many projects simply should not have been built, observed the

principal at Richard Flier Interests, a Brookline real estate firm.13

Some of the most serious difficulties in the commercial real estate markets occurred

in New Englands condominium market, where some developers went bankrupt when units

failed to sell.14 The condominium market in Connecticut was so glutted in early 1990 that

just absorbing the units then available was expected to take two years.15 An illustration of

the depth of the problem was an action taken by the Collaborative Co., one of Bostons

leading specialists in marketing troubled properties, which made news in the spring of 1990

by halving prices at the St. George condominium development in Revere.16

The commercial real estate debacle was graphically demonstrated by banking analyst

Gerard Cassidy of Tucker, Anthony Inc., Portland, Maine, who developed a 40-mile guided

tour of New England real estate lending disasters for potential investors. One stop on a 1990

tour was a rubble-strewn development site in the Boston suburb of Weymouth, with a

ghostly row of unfinished condominium units long abandoned by builders. A bank had lent

$25 million for the development of the property and had foreclosed in June 1990. Another

stop, this one in Bostons high-tech heartland, revealed empty commercial space with

boarded-up windowsten empty buildings within an area of a mile and a half. I thought I

knew how bad it was, said a portfolio manager at Fidelity Investments who took the tour,

but it was worse than I anticipated. I mean, 20-story towers of see-through tinted green

glass: What I saw was no different than Dallas during the worst days of the slump.17

The commercial real estate market was not alone in its volatility. The New England

housing market, too, had a turbulent decade. As the region emerged from the national recession of 198182, housing was not much more expensive in New England than in the rest

of the country. In 1983, the median home resale price in Boston was $82,600, 17 percent

above the national median of $70,300 (see figure 10.4). In Providence in the first quarter of

1983 the median was 26 percent below the national median. But strong pent-up housing demand and slowly responding supply led to a boom in housing prices throughout New England from 1983 to 1987. In Boston, resale prices rose 21 percent in 1984, 34 percent in

1985, and 19 percent in 1986. In 1987, Bostons median home resale price reached
An Examination of the Banking Crises of the 1980s and Early 1990s Volume I

344 History of the EightiesLessons for the Future

Boston

U.S.

Figure 10.4

Median Home Resale Prices, Boston versus U.S.,

1982–1995

Source: National Association of Realtors

1982 1984 1986 1988 1990 1992 1994

40

80

120

160

200

$Thousands

18 Data on Boston housing prices were obtained from the National Association of Realtors. Other housing price information

in the paragraph was derived from Jenks et al., New England Economic Summary, viii, ix. 19 Information in this paragraph is derived primarily from Karl E. Case, The Real Estate Cycle and the Economy: Consequences of the Massachusetts Boom of 198487, Federal Reserve Bank of Boston New England Economic Review (September/October 1991): 3739.

$177,200, which was 115 percent higher than in 1983 and more than twice the national median price (which had increased by only 22 percent during the same four years). The price

boom lagged one year in Providence and two years in Hartford, where the most rapid increases occurred in 1986 and 1987, respectively. Nevertheless, the result was the same: by

1988, housing in New England was more than twice as expensive as comparable housing in

most other parts of the country.

18

Favorable economic conditions certainly played an important role in the housingprice escalation in New England.19 For example, a building boom coupled with expansion

in the regions trade and service sectors created a substantial increase in the demand for labor. This helped personal income increase more rapidly in New England than in any other

part of the country between 1984 and 1988. Higher home prices were also supported by advantageous tax laws, favorable demographics, lower interest rates, and an accommodating

banking sector. Yet despite these positive economic circumstances, economists Karl E.

Case and Robert J. Shiller argued that fundamentals alone were insufficient to explain the
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 345

20 Citations for the other articles referenced in this paragraph can be found in Case, The Real Estate Cycle, 46. 21 Weinstein, New England Banks. 22 Browne, Why New England Went the Way of Texas, 36. 23 Information in this paragraph was derived primarily from Jenks et al., New England Economic Summary, ix.

extent of the price increases, at least in Boston. For example, Cases 1986 model, which

took into account a number of variables that affected prices, predicted a 15 percent increase

in single-family housing prices in Boston between 1983 and 1986, whereas in fact the

prices approximately doubled. Case and Shiller also wrote articles in 1988, 1989, and 1990

contending that home buyers were significantly influenced by boom psychology.

20 In other

words, reacting to rising prices and generally favorable economic conditions, home buyers

paid inflated prices in anticipation of future price increases and capital gains.

Some individuals were indeed worried about potential problems from the escalating

real estate prices. For example, in mid-1987 a senior vice president at Moseley Securities

Corp. in Boston expressed concern because weve had enormous inflation in real estate

values. If theres a slight hiccup up here, there could be serious repercussions.21 Nevertheless, despite occasional views such as these, most observers were far more anxious about

the long-term consequences of high housing prices on the regions ability to attract workers. In fact, the rising prices of real estate were generally seen as a sign of economic health

in the short term.22

The escalation in home prices occurred even though the population of the region grew

at a very slow pace.23 Prices were therefore rising not because more people wanted to live

in New England but because the optimism of those who lived there led them to purchase

larger, more expensive dwellings in the expectation of future price increases. As a result,

when residential construction finally caught up with the price explosion, the region overbuilt and overbuilt quickly. Excess supply began to appear in areas of New England as early

as 1987. (Compounding the problem, the regional economy began faltering at the end of the

decade, exhibiting falling employment and slow growth in personal income.) The combination of overproduction and slowing demand led to a softening, though not a collapse, of

home prices throughout the area. For example, median home resale prices in the Boston

area increased by less than 1 percent from 1988 to 1989 and then fell 4 percent from 1989

to 1990 and another 2 percent from 1990 to 1991.

New York and New Jersey

In New York and New Jersey, too, the commercial real estate sector was overbuilt and

exhibited serious problems. In New York City, for example, zoning and tax incentives had

prompted a flurry of excess building, with the result that office vacancy rates escalated

throughout the 1980s, leaving Manhattan with about 25 million square feet of vacant office
An Examination of the Banking Crises of the 1980s and Early 1990s Volume I

346 History of the EightiesLessons for the Future

Figure 10.5

Office Vacancy Rates in New York City,

1980–1994 Percent

Source: CB Commercial/Torto Wheaton Research, The Office Outlook (spring

1997), vol. 2.

1980 1982 1984 1986 1988 1990 1992 1994

0

5

10

15

20

24 Stephen Kleege, Fate of Banking in the 1990s Hinges on Real Estate Loans, American Banker (October 15, 1990), 1,

24; and Larry Light and John Meehan, The Walls Keep Closing In on New York Developers, Business Weekly (July 2,

1990): 72. 25 Light and Meehan, The Walls Keep Closing In, 72. 26 David Brauer and Mark Flaherty, The New York City Recession, Federal Reserve Bank of New York Quarterly Review

17, no.1 (spring 1992): 70.

space by mid-1990 (see figure 10.5).24 At the same time, office vacancy rates were even

higher in the New York suburbs than in Manhattan.25

The substantial amount of vacant office space put downward pressure on rents. Between 1988 and 1992 the Torto Wheaton Rent Index for Long Island showed a 25.3 percent

decline, and between 1988 and 1993 the index for New York City showed a 23.0 percent decline (see figure 10.6). Nationally over the same periods this index fell 5.4 percent and 7.3

percent, respectively. Official statistics on rental rates were likely to have masked the pattern of newly negotiated contracts, which probably showed a greater response to the depressed market. Falling rents notwithstanding, between 1987 and the last quarter of 1991 the

vacancy rate for downtown office space grew from just over 10 percent to over 20 percent.26

The residential market in New York also weakened significantly. During the 1980s,

residential home prices in New York rose at rates considerably above the national average.

By 1988, the median single-family home in the New York metropolitan area sold for as
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 347

U.S.

New York

City

Long

Island

Figure 10.6

Rent Indices, New York City and Long Island

versus U.S., 1980–1995

Source: CB Commercial/Torto Wheaton Research, The Office Outlook (fall

1996), vols. 1 and 2.

1980 1982 1984 1986 1988 1990 1992 1994

10

15

20

25

30

Level ($)

27 Ibid. 28 Michael Quint, Northeast Banks Face Heavy Losses on Problem Loans, The New York Times (December 15, 1989),

available: LEXIS, Library: NEWS, File: NYT. 29 Light and Meehan, The Walls Keep Closing In, 73. 30 Brauer and Flaherty, The New York City Recession, 70. 31 Light and Meehan, The Walls Keep Closing In, 72. 32 Ibid., 73.

much as $194,000, more than double the national average and almost triple what the median

price of a home had been in the New York area in 1981.27 However, after 1988 prices began

declining. In the New York City area, for example, prices of homes fell approximately 5 percent in 1989.28 By mid-1990, the weak housing market increased the average time needed to

sell a residential unit to six months, double the time that had been required in 1987.29 Residential prices continued to fall, and by the fourth quarter of 1991, median single-family

home prices in the New York metropolitan area had declined by 12 percent from their peak,

to $170,800.30 Cooperatives and condominium units were hit particularly hard and many developments were as empty as mausoleumsdespite falling prices.31 In fact, the price declines of condominium developments were sometimes staggering. For example, in

mid-1990 in New York City, broker Saul Stolzenberg tried to sell an empty 66-unit building

that he said had a value of $14.5 million. The only offer he received was $6 million.32 There
An Examination of the Banking Crises of the 1980s and Early 1990s Volume I

348 History of the EightiesLessons for the Future

33 The Northeast is home to a substantial portion of the savings bank industry, and savings banks and savings associations

were historically mutual-form institutions. As of 1986, approximately 32 percent of the regions depositories were savings

banks, 23 percent were savings associations, and 45 percent were commercial banks. In the early 1980s, many northeastern states legalized mutual-to-stock-form conversions. Between 1985 and 1990, 199 mutual-form depositories in the

Northeasta third of the 586 savings banks and savings associations in the region as of year-end 1984converted to stock

form. The converted institutions typically exhibited rapid asset growth, which also contributed to a significant number of

failures. For further discussion of this subject, see Jennifer L. Eccles and John P. OKeefe, Understanding the Experience

of Converted New England Savings Banks, FDIC Banking Review 8, no. 1 (winter 1995).

are indications that portions of the New Jersey housing market suffered similar declines.

For example, from 1989 to 1990 the National Association of Realtorsmedian sales price of

existing single-family homes declined by 8 percent for Bergen and Passaic, and 3 percent

for Middlesex, Somerset, and Hunterdon.

Banking and Real Estate in the Northeast

The northeastern region is a highly concentrated banking market. As of year-end

1994, it was the nations largest in terms of domestic banking assets. At the end of 1980,

when the region contained only 5 percent of U.S. commercial and savings banks, these

banks nevertheless accounted for 17 percent of domestic bank assets. By year-end 1994,

when northeastern banks constituted 7 percent of U.S. banks, their share of domestic bank

assets had increased to more than 24 percent. Although much of this bank asset concentration can be attributed to the large money-center banks located in New York, many of the

other northeastern states contain densely populated urban centers with strong banking markets that have been fostered not only by the regions high population density but also by its

well-established educational, commercial, industrial, and manufacturing industries. Moreover, the regions state legislatures have been very supportive of the banking industry, typically leading the nation in expanding bank products and powers.

Many northeastern banks aggressively participated in the booming real estate markets

of the 1980s. Between 1983 and 1986, bank asset growth for the region increased from an

annual rate of less than 1 percent to nearly 12 percent (see figure 10.7). This growth was

supported by substantial new capital investment during the 1980s resulting from increases

in mutual-to-stock-form bank conversions, capital restructuring, retention of high levels of

income, and an increase in bank chartering.

The conversion of savings banks from mutual to stock ownership was especially significant for asset growth.33 Mutual-form institutions have no equity shareholders and therefore must rely solely upon internally generated capital. Conversion to stock form provided

institutions with access to equity capital and an expanded potential for loan growth, thus

augmenting an institutions ability to participate in the regions booming real estate markets. In addition, conversion to stock form often caused an institution to feel pressure to
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 349

Northeast

Banks

U.S.

Banks

Figure 10.7

Asset Growth Rates, Northeast versus U.S.,

1975–1994

-5

0

5

10

15

20

Year-end

Percent

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994

seek substantial increases in earnings: conversion led to a significant increase in an institutions capitalization, thereby diluting returns on equity. To maintain competitive returns on

equity, a rise in the volume of loans and other earning assets was therefore needed.

Chartering activity, which was also an important contributor to the expansion of the

northeastern banking markets, escalated in the Northeast as the economy prospered: during

the 1980s the annual number of new charters soared from 3 in 1980 to a peak of 39 in 1987,

and the total number of banks chartered in the region was 212. After the regions economy

weakened, chartering steadily declined, and in 1994 only 3 charters were issued. 

Overall lending concentrations at the regions banks rose substantially during the

1980s, primarily because of real estate loans (which had represented a sizable portion of

northeastern banksloan portfolios even before the real estate market boom). Between 1983

and 1988 the median loans-to-assets ratio for northeastern banks jumped from a low of just

under 55 percent to a peak of 73 percent, an increase that significantly exceeded the national trend (see figure 10.8), and between 1983 and 1986 the median total real estate loan

concentration as a percentage of bank assets rose from approximately 25 percent to nearly

39 percent; in 1989, it reached a high of 51 percent (see figure 10.9). (It should be noted that

a portion of this growth is attributable to the fact that a large number of state-insured savings banks obtained FDIC insurance between 1980 and 1986 and began reporting financial

data to federal bank regulators. The savings banksreal estate activity is therefore not fully
An Examination of the Banking Crises of the 1980s and Early 1990s Volume I

350 History of the EightiesLessons for the Future

Northeast

Banks

U.S. Banks

Figure 10.8

Median Gross Loans and Leases,

Northeast versus U.S., 1976–1994

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994

50

55

60

65

70

75

Year-end

Percent of Assets

Northeast

Banks

U.S. Banks

Figure 10.9

Median Total Real Estate Loans,

Northeast versus U.S., 1974–1994

1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994

10

20

30

40

50

60

Year-end

Percent of Assets
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 351

Figure 10.10

Median Commercial and Industrial Loans,

Northeast versus U.S., 1974–1994

Percent of Assets

Northeast

Banks

U.S. Banks

1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994

2

4

6

8

10

12

Year-end

34 In the Northeast, the number of savings banks reporting to federal bank regulators rose from approximately 287 in 1980 to

444 by 1986. Events in Massachusetts accounted for a large proportion of this increase. After the failure of Ohios private

deposit insurance fund, privately insured mutual savings banks and cooperative banks in the Commonwealth of Massachusetts recognized the potential for a loss of public confidence in their private fund. The Massachusetts Banking Department required approximately 200 savings banks to acquire federal deposit insurance from either the FDIC or the Federal

Savings and Loan Insurance Corporation. Most of the institutions obtained FDIC deposit insurance (FDIC, Annual Report

[1985], 1617). The failure of many savings banks and the industrys consolidation by the late 1980s and early 1990s reduced the number of savings banks in the Northeast at year-end 1994 to 367.

reflected in the data until 1986.)34 This expansion in real estate lending may have been due

partly to the shrinkage of the banks traditional loan markets, as is indicated by the decline

in the concentrations of commercial and industrial loans throughout the 1980s (see figure

10.10). 

The higher concentrations of real estate loans reflected activity in both residential and

commercial real estate lending. The median ratio of residential real estate loans to bank assets rose from about 19 percent in 1980 to approximately 23 percent in 1986 and then

climbed to 32 percent in 1994 (see figure 10.11). More significant was the growth in commercial real estate lending, particularly the relatively risky short-term loans secured by

properties in development whose income-generating potential was uncertain at the time the
An Examination of the Banking Crises of the 1980s and Early 1990s Volume I

352 History of the EightiesLessons for the Future

Northeast

Banks

U.S. Banks

Figure 10.11

Median Residential Real Estate Loans,

Northeast versus U.S., 1974–1994

1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994

5

10

15

20

25

30

35

Year-end

Percent of Assets

35 See Chapter 3.

loans were made.35 The median commercial real estate loan concentration for the regions

banks, as a percentage of bank assets, rose from 6.5 percent in 1982 to a peak of 14 percent

in 1989 and 1990 (see figure 10.12).

The loan expansion of the early 1980s was initially successful in augmenting profits

by generating substantial interest and non-interest income, as is indicated by the rise in the

median return on assets (ROA) for northeastern banks from 0.72 percent in 1980 to 1.06

percent by 1986 (see table 10.4 on p. 365). However, the weakening real estate market of

the late 1980s led the northeastern banksROA to drop to only 0.20 percent in 1990. (Interestingly, the rise in northeastern banksROA occurred while the ROA for banks outside the

Northeast was declining, and conversely the decline in the northeastern banks ROA occurred during a generally rising trend in ROA for other banks.) This drop in the Northeast

was largely attributable to problems of asset qualityproblems widely held to have been

caused primarily by the increase in commercial real estate lendingas the regional recession and real estate market bust led to rising levels of nonperforming assets and increasing

loss rates on these assets (see figures 10.13 and 10.14).
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 353

Figure 10.12

Median Commercial Real Estate Loans,

Northeast versus U.S., 1980–1994

1980 1982 1984 1986 1988 1990 1992 1994

0

4

8

12

16

Year-end

Percent of Assets

Northeast

Banks

U.S. Banks

Figure 10.13

Median Total Nonperforming Assets,

Northeast versus U.S., 1982–1994

1982 1984 1986 1988 1990 1992 1994

0.0

1.5

3.0

4.5

6.0

Year-end

Percent of Assets

Northeast

Banks

U.S.

Banks
An Examination of the Banking Crises of the 1980s and Early 1990s Volume I

354 History of the EightiesLessons for the Future

Figure 10.14

Median Net Charge-Offs on Loans and Leases,

Northeast versus U.S., 1976–1994

Year-end

Percent of Assets

Northeast

Banks

U.S.

Banks

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994

0

0.1

0.2

0.3

0.4

0.5

36 Marian Courtney, The Great Loss: Analyzing the Northeast Banking Crisis, Business Credit 93, no. 6 (June 1991): 10. 37 Quint, Heavy Losses on Problem Loans. 38 Ibid; and Charles McCoy and Ron Suskind, FDICs Expected Losses Reflect Slump in Northeast: Increase in Reserves

Stems from the Agencys Fear of Major Bank Failures, The Wall Street Journal (December 20, 1990), available: WESTLAW, File: WSJ.

Bankers in the Northeast remember 1990 as the year they were hit harder than bankers

in any other region by losses precipitated by a plunge in real estate values.36 With office vacancy rates reaching 25 to 30 percent in places like central New Jersey and Stamford, Connecticut, and with many condominium developments only half filled after two years on the

market, a number of developers were unable to repay their bank loans. L. William Seidman,

chairman of the FDIC, noted in late 1989 that certain northeastern areas have some of the

highest commercial vacancy rates in the country.37 Even more disturbing was the fact that

eight of the ten states whose banks showed the highest increase in bad real estate loans in

1989 were in the Northeast. In addition, according to an analysis of second-quarter 1990 results prepared by Veribanc Inc., a Wakefield, Massachusetts, consulting firm, the 15 U.S.

banks whose problem domestic loans were most in excess of equity and reserves were all in

the Northeast.38 Robert Clarke, the Comptroller of the Currency, stated in early 1990 that

real estate was the main cause of weakness among national banks in the Northeast, noting
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 355

39 Barbara A. Rehm, Banks Binging Despite Realty Hangover, American Banker (March 8, 1990), 1. 40 Quint, Heavy Losses on Problem Loans. 41 Ibid. 42 All quotations in this paragraph are from Nina Easton, et al., Shaky Real Estate Loans Hitting Banks, American Banker

(June 4, 1987), 10. 43 Quint, Heavy Losses on Problem Loans.

that during 1989, nonperforming real estate loans jumped to $9.1 billion from $3.6 billion

at Northeastern banks.39

The root of these problems, according to some analysts, was overzealous lending by

institutions that sought new markets because opportunities to lend to businesses had dwindled and foreign lending frequently resulted in losses. This eagerness to lend led to an excessive number of new buildings flooding the market in many areas.40 Losses on real estate

loans hit savings banks in the Northeast particularly hard, according to Don J. Fauth, an analyst at the First Albany Corporation, a securities firm. He noted that savings banks raised

additional capital by issuing stock to investors during the 1980s and then attempted to increase profits through risky lending on construction projects rather than stay with their traditional home mortgage lending business.41

The real estate problems that hit the northeastern banks beginning in 1989 had been

quite unexpected just two years earlier. Bankers confidence in northeastern real estate had

been strong because the commercial real estate markets in the region remained robust despite problems nationwide. Nationally the Comptroller of the Currency expected troubled

commercial real estate loans to be one of the factors behind lower bank earnings in 1987,

stating in mid-1987 that the number of nonperforming assets is high and its going to get

higher.42 Others, too, believed that problems with commercial real estate loans nationally

would worsen before improving. For example, Robert Grossman, a bank analyst at Standard & Poors Corp., said in 1987, I think its a while before we hit bottom. By contrast,

real estate in the Northeast appeared to be in excellent shape. James F. Murray, senior vice

president at Chase Manhattan Bank, observed in mid-1987 that the whole Northeast corridor is much stronger than the rest of the country.

Even though many bankers in the Northeast became cautious soon thereafter and began cutting back on new lending and tightening loan standards as early as 1988, they were

still overwhelmed by the real estate markets rapid deterioration.43 It quickly became apparent that real estate would cause severe problems for many banks. Commenting on the

situation, Michael Zamorski, deputy regional director for the FDIC, observed in mid-1991

that banking problems shift geographically with the economy. Troubles in agriculture led
An Examination of the Banking Crises of the 1980s and Early 1990s Volume I

356 History of the EightiesLessons for the Future

44 Courtney, The Great Loss, 1011. 45 Both comments were made in 1987. See Weinstein, Healthy Real Estate Market, 12, 18. 46 Joe Peek and Eric S. Rosengren, The Capital Crunch in New England, Federal Reserve Bank of Boston New England

Economic Review (May/June 1992): 21, 24. 47 Michael Weinstein, Slower Growth Forecasted for New England Financial Institutions, American Banker (January 10,

1989), 28. 48 Ibid. 49 Phil Roosevelt, Home Loan Defaults Rise in Northeast; Region Shows Foreclosure Gains as US Figure Decreases,

American Banker (June 22, 1989), 2. Quotations and information in the balance of this paragraph are from the same source.

to bank failures in the Midwest, then falling energy prices caused problems in the Southwest. Now the focus is in the Northeast, where the worst real estate problems are.44

New England

The boom and bust in New England real estate took its toll on the areas banks, which

had been among the healthiest in the nation during much of the 1980s but which later experienced high rates of failure, primarily because of their extensive exposure to real estate

loans. During the 1980s, real estate portfolios at New England banks grew at twice the national rate, and some lenders, in the belief that weve just had such a terrific market, its

hard to make mistakes, became lax. Moreover, bankers generally believed that New Englands diversified economy would protect the region from a real estate debacle. Said one

banker, I dont see any disasters out there.45

At the end of the 1980s, when economic growth and nominal real estate prices began

to decline in New England, cash-flow problems as well as the diminished collateral values

led many borrowers to stop making their loan payments.46 By early 1989, according to one

analyst at Merrill Lynch, everyone was very jittery about real estate.47 The anxiety may

have stemmed from credit-quality problems that had begun to surface rather frequently at

many New England banks and other financial institutions. Yet at the beginning of 1989, despite mounting problems with real estaterelated loans, most analysts and bankers continued to remain cautiously optimistic because of New Englands basically healthy and

diversified economy. Dennis F. Shea, who followed New England banks for Morgan Stanley & Co., said in early 1989 that Im not expecting a debacle. I think its a very good

banking market. I think what its suffering from is indigestion.48

The banks, however, turned out to be more than dyspeptic. For example, during the

first quarter of 1989, while the nation as a whole exhibited a decline in foreclosures, in New

Hampshire foreclosures on conventional mortgages rose from 0.05 percent of all such mortgages a year earlier to 2.41 percentthe largest such gain in any state. The second-largest

increase was in Massachusetts, from 0.10 percent to 0.49 percent.49 Cynthia Latta, senior financial economist for DRI/McGraw Hill Inc., explained this rise in foreclosures by noting
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 357

50 The discussion in this paragraph is based on Browne and Rosengren, Real Estate and the Credit Crunch, 28; and Peek

and Rosengren, Capital Crunch, 24, 2627, 30. 51 For a discussion of the development of capital standards, see Chapter 2.

that home buyers throughout the Northeast have had to really stretch themselves to the

limit to buy homes in the past two years (at the time, fixed-rate-mortgage monthly payments in the Northeast were about $1,000, compared with $620 nationwide) and, she said,

their burden became heavier as buyers who took adjustable mortgages in the past two

years experienced steady payment increases, first as the loans adjusted from their introductory teaser rates and then as market rates increased. Robert Rosenblatt, an economist

with the Mortgage Bankers Association, said he had found anecdotal evidence that many

lenders in New England qualified borrowers based on payment sizes as set by teaser rates,

rather than second-year rates (secondary markets generally require borrowers to be qualified on the basis of the maximum second-year rates). Moreover, New England lenders

tended to retain loansand thus the risk of defaultin their own portfolio rather than sell

them in the secondary market. 

A rapid increase in nonperforming loans led to serious problems for New England

banks in 1989.50 The banks were hit particularly hard by commercial real estate loan losses.

Many commercial projects were highly leveraged, and the owners were frequently individuals or partnerships whose assets either were unavailable to banks or were concentrated in

real estate whose value was declining. Banks were therefore forced to absorb much of the

loss on commercial real estate projects. As it became clear that loan losses would be substantially greater than anticipated, banks dramatically increased loan-loss reserves, thereby

causing a rapid deterioration in bank capital throughout the region. Coincident with this

substantial erosion of the capital base of New England banks, regulators were placing increased emphasis on bank capital ratios. Banks with substandard capital-to-assets ratios

were required to either increase equity capital or shrink their asset portfolios. Since loan

losses prevented banks from increasing capital through retained earnings, the only realistic

alternative for raising capital was to issue new shares. For many institutions, however, such

an option was not feasible, because investors required a large risk premium, which made it

difficult to sell stock at a reasonable price. As a result, the only choice open to many New

England banks that were trying to satisfy their capital-to-assets ratio requirements was to

reduce the size of their institution. Thus, New England banks substantially contracted during the early 1990s. Although some shrinkage was inevitable after the collapse of the areas

real estate markets and slowdowns in both the New England and the national economies,

some observers believed that the effects were aggravated by the increased emphasis on

bank capital ratios.51
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358 History of the EightiesLessons for the Future

52 Gordon Matthews, New Jersey Banks Wont Rebound Anytime Soon, Rating Agency Says, American Banker (November 16, 1990), 24. 53 David Neustadt, Jersey Braces for Lending Slowdown; Vacancy Rates Drop, But So Does Demand for Space, American

Banker (November 21, 1989), 10. 54 Ibid. 55 Ibid. 56 Matthews, New Jersey Banks Wont Rebound Soon, 24. 57 Ibid. 58 Courtney, The Great Loss, 11; and Michael Quint, A Crystal Ball for Bankings Ills, The New York Times (January 12,

1991), available: LEXIS, Library: NEWS, File: NYT. 59 John Meehan, Larry Light, Geoffrey Smith, Joseph Weber, and bureau reports, For Banks, the Panic Is Coming to an

End, Business Week (June 17, 1991): 87. 60 Ibid.

New York and New Jersey

New Jerseys real estate experience was similar to New Englands and caused problems for many of the states banks. During the 1980s, New Jerseys strong economy made

it one of the most desirable banking areas in the country.

52 By the end of the decade, although the states commercial real estate boom was over, banks expected a soft landing, not

a collapse such as had shaken the Southwest and New England. This expectation was based

partly on the diversification of the states economy. As an analyst with a New York brokerage firm noted, Five hundred of the Fortune 1,000 have a significant presence in New Jersey.53 But later that same year (1989) the same analyst stated, Every bank in [New Jersey]

has experienced a significant increase in nonperforming loans.54 In the third quarter of

1989, for a group of New Jersey banks rated by Thomson BankWatch, nonperforming loans

of all types were up 25 percent.55 By late 1990, major New Jersey banks had suffered

through a severe slide in real estate values and, according to a report by Fitch Investors Service, Inc., were not likely to feel relief soon.56 The credit rating firm noted that sharply deteriorating asset quality is destroying earnings and eroding capital ratios at most major New

Jersey banks.57 Even the $24 billion Midlantic Corporation in Edison, New Jersey, the

second-largest banking company in the state and, according to analysts, one of the best run,

suffered greatly from real estate loan losses.58

By mid-1991, the collapsing real estate markets caused many bankers to abandon

their belief that such problems would solve themselves because the property market would

inevitably recover.

59 The typical bankers approach was always to give developers time to

work out their problems, said an executive in charge of real estate lending at a New York

money-center bank. Now, bankers believe the change in value is permanent. Prices arent

coming back to their old levels.60

In New York the story was similar. Primarily because of the weak real estate markets,

the seven largest New York banks ended 1990 with $30.7 billion worth of nonperforming
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 359

61 Jed Horowitz, NY Bank Profit Disappointing as Loans Falter, American Banker (February 8, 1991), 1. 62 Courtney, The Great Loss, 11. 63 Horowitz, NY Bank Profit Disappointing, 13. 64 Ibid. 65 Information in this paragraph was taken from Mark R. Wolff, CrossLand Savings, Before and After, Bottomline 6, no. 3

(March 1989): 44, 46. 66 Unless otherwise noted, information in this paragraph was taken from John Liscio, Star-Crossed CrossLand: But a Recap

Plan Could Revive the Thrifts Prospects, Barrons 70, no. 18 (April 30, 1990): 3031.

assets, compared with $24.1 billion at year-end 1989.61 The New York money-center banks

suffered relatively greater losses than the smaller banks. For example, Citicorp, then the nations biggest banking organization with assets of $217 billion, lost $382 million in the

fourth quarter of 1990.62 Chase Manhattan, then the nations third-largest bank, continued

to reel from its $9.5 billion portfolio of deteriorating commercial real estate loans, adding

$200 million to its provision for possible credit losses in the fourth quarter of 1990 while

charging off $230 million worth of domestic loans.63 Chemical Bank recorded high real estaterelated loan losses in its New YorkNew Jersey home base, where problem assets were

27 percent higher in the fourth quarter of 1990 than in the third quarter.

64

The collapsing real estate markets hit the two statessavings banks with a vengeance.

Several large savings banks suffered huge losses, primarily from nonperforming real estate

loans, and failed in 1992. These included CrossLand Savings Bank (New York, $7.4 billion

in assets), DollarDry Dock (New York, $4.0 billion in assets), The Howard Savings Bank

(New Jersey, $3.5 billion in assets), and American Savings Bank (New York, $3.2 billion in

assets).

CrossLand was a particularly interesting case because of the circumstances leading to

its collapse as well as the methods used to resolve the failure (see footnote 70). Although it

lost millions in the junk bond market, losses on commercial real estate loans were the primary cause of its failure. In early 1986, CrossLand Savings converted from mutual to stock

ownership and, by early 1989, had increased its asset size from $8 billion to just over $15

billion.65 The once-specialized thrift that was primarily a lender on apartment buildings and

other commercial real estate in the New York metropolitan market became a diversified financial services company that operated up and down both coasts through acquisitions of

other financial institutions. CrossLands activities included mortgage banking, commercial

and consumer lending, discount brokerage and life insurance services, and real estate development.

In the first quarter of 1990, CrossLand realized a loss of $136.5 million.66 Much of the

problem was due to the Office of Thrift Supervisions (OTS) new rule that disallowed the inclusion of CrossLands $363 million of cumulative preferred stock as core capital, thereby

creating a capital deficiency of $113 million. Because it was undercapitalized, CrossLand
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360 History of the EightiesLessons for the Future

67 CrossLand Savings, Brooklyn, Placed in Receivership; Depositors Protected, U.S. Newswire (January 24, 1992), available: LEXIS, Library: NEWS, File: WIRES. 68 Ibid. 69 Susan Benkelman and Timothy L. OBrien, CrossLand Bailed Out; Seized Thrift Gets $1.2B from FDIC, Newsday (January 25, 1992), available: LEXIS, Library: NEWS, File: NEWSDY; and Phil Roosevelt and Barbara Rehm, CrossLand

Seized as Regulators Reject Bids, American Banker (January 27, 1992), 10. 70 In response to the FDICs solicitation of bids for the failed bank, the best offer submitted was only $17 million for CrossLands branches. Accepting that offer would have left the FDIC with the task of disposing of billions of dollars worth of

real estate loans and investments. As a result, under what then-Chairman William Taylor called his bank hospital plan,

the FDIC decided to spend $1.2 billion to keep the bank open, intending to nurse it back to health and sell it for more than

it would bring in January 1992. Chairman Taylor believed that this was a less-expensive course of action than closing

CrossLand; in addition, he said the FDIC wanted to let [the bidders] know that we have alternatives and that the FDIC

was willing to keep banks open rather than give them away. Under the hospital plan, CrossLand executives renegotiated

with borrowers rather than automatically foreclosing and selling off their holdings, according to Richard Kraemer, the veteran banker whom the FDIC had installed as CrossLands president. According to an April 1994 GAO report, the FDIC expected savings of $517 million as a result of having used this method of dealing with CrossLands failure. In August 1993,

the FDIC sold CrossLand by public offering and realized savings from the conservatorship sale (adjusted as if savings had

been realized in 1992) of around $333 million (Jerry Knight, FDICs Hospital Plan a Bitter Pill for Some; Government

Takeover of Ailing CrossLand Savings Bank Called Unfair, Uneconomical, The Washington Post [March 1, 1992], available: LEXIS, Library: NEWS, File: WPOST; and U.S. General Accounting Office, Failed Bank: FDIC Sale of CrossLand

Conservatorship Satisfied Least-Cost Test [GAO-GGD-94-109, April 1994], 89). 71 Information about The Howard Savings Bank is taken from James L. Freund, Howard Savings Bank: Observations of

Regulator/Banker Differences in Evaluating Commercial Real Estate Risks (unpublished paper, FDIC, 1996).

was forced to sell its junk bond portfolio in a weak market, suffering a substantial loss. In

early 1990, CrossLand had 22 percent of its assets in Metropolitan New York City commercial real estate loans, and the bank was adversely affected in 1990 and 1991 by the decline

in the areas real estate market. Further, management asset-allocation decisions left CrossLand highly vulnerable to the fortunes of the real estate markets, as could be seen at yearend 1990 when approximately 49 percent of the banks portfolio was composed of high-risk

real estate investments and acquisition, development, and construction loans.67 As of September 30, 1991, regulators had classified 21.5 percent ($1.68 billion) of CrossLands assets

as substandard or lower.

68 These circumstances resulted in CrossLands incurring net losses

of $421 million in 1990 and an additional $308 million for the first nine months of 1991,

which wiped out its equity capital.69 On January 24, 1992, CrossLand Savings of Brooklyn

was closed by the OTS, and the FDIC was appointed receiver of the institution.70

The Howard Savings Bank was another notable loser in the floundering real estate

markets. The 70-branch, state-chartered savings bank based in Livingston, New Jersey, was

the largest bank failure in New Jerseys history.

71 By the mid-1980s, the banks portfolio

had become heavily concentrated in commercial real estate loans. The assets of the bank

peaked near $5.2 billion in 1988 and then declined to $3.5 billion by October 1992. Although the overall rate of asset growth was relatively moderate during the 1980s, loans and
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 361

72 The CAMEL rating system refers to capital, assets, management, earnings, and liquidity. In addition to a rating for each of

these individual or component categories, an overall or composite rating is given for the condition of the bank. Banks

are assigned ratings between 1 and 5, with 5 being the worst rating a bank can receive. See Chapter 12 for a detailed explanation of CAMEL ratings.

real estate investments nearly doubled between 1984 and 1989 (from $2 billion to approximately $3.7 billion). By 1988, The Howard was already burdened with severe commercial

real estate problems. The Report of Examination for 1988 noted a rapid increase in total

classified loans due to poor credit underwriting and administration and a desire for loan

growth and out-of-area lending. As the economy weakened in the late 1980s, The Howard

experienced massive asset deterioration and debilitating losses; the banks CAMEL rating

dropped from a 2 in 1988 to a 5 January 1992.72 After three successive years of substantial

losses resulting from its aggressive real estate lending practices, The Howard was declared

insolvent and placed in receivership on October 2, 1992. It was a somber ending for the

135-year-old institution, which had been able to survive the Great Depression but succumbed to the real estate bust.

Bank Performance

The northeastern banking markets had historically been extremely stable, and until the

1990s, few banks had failed. Even during the turbulent 1980s there was an average of only

three bank failures a year in the region (see figure 10.15). Moreover, in 1986 and 1987,

when the northeastern real estate markets were still healthy, the regions banks were sound

and compared very favorably with banks outside the Northeast. For those two years,

CAMEL ratings of northeastern banks were superior, on average, to those of all U.S. banks;

return on assets and return on equity were vastly superior to the U.S. average; the percentages of nonperforming assets to total assets and charge-offs to total assets were well below

those of all U.S. banks; a far lower percentage of northeastern banks had negative net income than did other banks; and northeastern banks had lower ratios of commercial and industrial (C&I) loans to assets than other banks. On the other hand, during those two years

the regions banks had substantially higher percentages of total loans to assets, real estate

loans to assets, and commercial real estate loans to assets.

Despite the very sound condition of the regions banks in 1986 and 1987, analysis

demonstrates that beginning in 1989 they experienced drastic, pervasive deterioration. As

the discussion below indicates, CAMEL ratings degenerated; ratios of median return on assets and nonperforming loans compared poorly with the ratios at other banks; the percent-
An Examination of the Banking Crises of the 1980s and Early 1990s Volume I

362 History of the EightiesLessons for the Future

Figure 10.15

Northeast Bank Failures, 1980–1994

1980 1982 1984 1986 1988 1990 1992 1994

0

15

30

45

60

Number

age of northeastern banks with negative net income skyrocketed; and the number of failures

escalated.

CAMEL ratings of the regions banks worsened along with the areas real estate problems (see table 10.2). For example, from 1983 through 1988, approximately 24 to 26 percent of all northeastern banks were rated 1; the comparable figure as of year-end 1991 was

10 percent. In addition, from year-end 1988 to year-end 1991, the percentage of 4-rated

northeastern banks rose from 2.1 percent to 16.5, percent and the percentage of 5-rated

banks rose from 0.6 percent to 6.7 percent. (In other words, the percentage of northeastern

banks that were rated 4 and 5 rose from 2.7 percent to 23.2 percent.) At the same time, the

percentage of all 4- and 5-rated banks that were located in the Northeast rose from 2.4 percent to 19.4 percent (see table 10.3).

Examination of the capital ratios of northeastern banks is also enlightening (see table

10.4). The ratio of equity to assets for northeastern banks remained fairly stable during the

troubled years and actually compared favorably with the percentages for the regions banks

during the first half of the 1980s. For example, from 1980 through 1984 the average ratio of

equity to assets for northeastern banks was only 6.9 percent, but from 1988 through 1992 it

increased to 7.8 percent. In contrast, the equity-to-assets ratio for other banks remained constant at 8.2 percent for both periods. The improvement in the capital ratios of northeastern
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 363

Table 10.2

CAMEL Ratings for All Northeastern Banks, 19811994

Report

Number of Banks/Percentage of Total

Date CAMEL Rating

(Year-end) 1 2 3 4 5 Total

1981 213 584 100 28 9 934

22.8 62.5 10.7 3.0 1.0 100%

1982 204 568 110 26 17 925

22.0 61.4 11.9 2.8 1.8 100

1983 210 540 81 18 16 865

24.3 62.4 9.4 2.1 1.9 100

1984 216 508 73 24 18 839

25.7 60.6 8.7 2.9 2.2 100

1985 242 573 76 15 18 924

26.2 62.0 8.2 1.6 2.0 100

1986 263 644 63 16 11 997

26.4 64.6 6.3 1.6 1.1 100

1987 263 646 64 15 5 993

26.5 65.1 6.5 1.5 0.5 100

1988 249 635 87 21 6 998

25.0 63.6 8.7 2.1 0.6 100

1989 200 621 113 40 18 992

20.2 62.6 11.4 4.0 1.8 100

1990 130 486 196 117 41 970

13.4 50.1 20.2 12.1 4.2 100

1991 91 364 236 148 60 899

10.1 40.5 26.3 16.5 6.7 100

1992 83 386 225 123 25 842

9.9 45.8 26.7 14.6 3.0 100

1993 118 473 147 70 18 826

14.3 57.3 17.8 8.5 2.2 100

1994 167 475 98 36 8 784

21.3 60.6 12.5 4.6 1.0 100

Note: Examination ratings were obtained from the FDICs historical database. In some instances examination ratings were

missing; however, from 92 to 99 percent of banks ratings were in the database. As a result, the number of CAMEL-rated

banks each year was slightly smaller than the total number of northeastern banks in other tables.

73 The total capital raised by converted savings banks in Massachusetts alone in 1986 was approximately $1.1 billion, sufficient capital to support a 17.5 percent increase in the states banking assets (assuming a 4.8 percent capitalization rate on

the additional assets). As a comparison, the largest bank in Massachusetts at year-end 1986 had equity capital of $1.2 billion (information derived from Eccles and OKeefe, The Experience of Converted New England Savings Banks, 1).

banks can be attributed largely to the substantial amounts of equity that resulted after savings banks converted to stock form.73
An Examination of the Banking Crises of the 1980s and Early 1990s Volume I

364 History of the EightiesLessons for the Future

Moreover, although the percentage of northeastern banks with very low (less than 5

percent) ratios of equity and reserves to assets rose from 1.3 percent in 1988 to 4.7 percent

in 1990, this ratio was still much lower than it had been for 198184, when it averaged 10.3

percent (see tables 10.5 and 10.6). In addition, the percentage of strong northeastern

banksthose with equity and reserves to assets exceeding 11 percentremained fairly

steady through the troubled years. It is noteworthy that in 1986 there was a large increase in

the percentage of northeastern banks with capital ratios greater than 11 percent. This jump

can be attributed primarily to the influx of mutual savings banks into the FDIC fund beTable 10.3

CAMEL 4- and 5-Rated Institutions, Northeastern Banks versus 

Banks in Rest of U.S., 19811994

Total

Northeastern

Report Number of 4- and 5-Rated Banks/Percentage of Total Banks/

Date Northeastern Other % Rated

(Year-end) Banks Banks Total 4 and 5

1981 37 196 233 934

15.9 84.1 4.0

1982 43 431 474 925

9.1 90.9 4.7

1983 34 628 662 865

5.1 94.9 3.9

1984 42 850 892 839

4.7 95.3 5.0

1985 33 1,190 1,223 924

2.7 97.3 3.6

1986 27 1,433 1,460 997

1.9 98.2 2.7

1987 20 1,280 1,300 993

1.5 98.5 2.0

1988 27 1,097 1,124 998

2.4 97.6 2.7

1989 58 979 1,037 992

5.6 94.4 5.9

1990 158 897 1,055 970

15.0 85.0 16.3

1991 208 863 1,071 899

19.4 80.6 23.2

1992 148 584 732 842

20.2 79.8 17.6

1993 88 303 391 826

22.5 77.5 10.7

1994 44 179 223 784

19.7 80.3 5.6
Table 10.4

Median ROA, ROE, and Equity Ratios of Northeastern Banks versus 

Banks in Rest of U.S., 19801994

Report

Number of Banks ROA ROE Equity-to-Assets

Date Other Other Other Other

(Year-end) NE Banks Banks NE Banks Banks NE Banks Banks NE Banks Banks

1980 1,030 13,728 0.72 1.13 10.26 13.52 7.15 8.26

1981 1,010 13,735 0.72 1.09 10.36 12.96 7.08 8.26

1982 974 13,794 0.75 1.04 10.55 12.44 6.86 8.28

1983 898 13,849 0.77 0.98 11.59 11.79 6.57 8.21

1984 883 13,891 0.82 0.91 11.61 11.00 6.62 8.11

1985 982 13,814 1.02 0.89 14.49 10.64 6.93 8.10

1986 1,055 13,613 1.06 0.77 14.45 9.33 7.21 7.90

1987 1,064 13,122 0.97 0.79 12.51 9.30 7.73 8.02

1988 1,061 12,552 0.81 0.88 9.90 10.19 7.83 8.06

1989 1,049 12,147 0.60 0.94 7.05 10.75 7.92 8.17

1990 1,016 11,799 0.20 0.89 2.78 10.24 7.71 8.09

1991 925 11,445 0.26 0.92 3.42 10.51 7.63 8.21

1992 858 11,123 0.65 1.10 8.04 12.30 7.91 8.51

1993 838 10,714 0.89 1.16 9.92 12.39 8.49 8.90

1994 792 10,270 0.89 1.11 9.87 11.92 8.68 8.90

Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 365

tween 1980 and 1985, many of which converted from mutual to stock form in 1986 and increased their equity capitalization substantially. The percentage of commercial banks with

capital ratios of 11 percent or more increased only slightly from year-end 1985 to year-end

1986 (from 14.6 percent to 15.1 percent). For savings banks, however, this ratio jumped

from 7.7 percent to 20.3 percent over the same period.

The percentage of nonperforming loans of northeastern banks reflected the deterioration in the regions real estate markets. From 1982 to 1987 the percentage was lower than

for other banks, but from 1988 through 1994 it was higher (see figure 10.16). During the

most troubled years, 199092, this percentage averaged 7.9 percent for northeastern banks,

compared with 3.6 percent for other banks. This high level of nonperforming loans led to a

substantial increase in the percentage of northeastern institutions with negative net income:

9.4 percent in 1988, 40.2 percent in 1990, and 35.2 percent in 1991 (see figure 10.17). Over

the same period, this ratio for other banks dropped from 14.9 percent to 10.5 percent.

This declining performance of the northeastern banks resulted in an enormous increase in the number of failures (see table 10.7). In 1989 there were 5; in 1990, 16; in 1991,

52; and in 1992, 43 (in 1993, the number tumbled to only 3). In 1991 and 1992, 5.6 percent

and 5.0 percent, respectively, of northeastern banks failed. Northeastern bank failures as a
An Examination of the Banking Crises of the 1980s and Early 1990s Volume I

366 History of the EightiesLessons for the Future

Table 10.5

Equity and Reserves to Assets, Northeastern Banks, 19801990

Report

Number of Banks/Percentage of Total

Date Equity Capital and Reserves to Total Assets

(Year-end) <5.0 5.07.0 7.09.0 9.011.0 >11.0 Total

1980 66 318 355 176 115 1,030

6.4 30.9 34.5 17.1 11.2 100%

1981 104 289 336 156 125 1,010

10.3 28.6 33.3 15.5 12.4 100

1982 114 305 304 142 109 974

11.7 31.3 31.2 14.6 11.2 100

1983 87 355 251 114 91 898

9.7 39.5 28.0 12.7 10.1 100

1984 85 346 270 92 90 883

9.6 39.2 30.6 10.4 10.2 100

1985 55 348 340 121 118 982

5.6 35.4 34.6 12.3 12.0 100

1986 34 344 353 142 182 1,055

3.2 32.6 33.5 13.5 17.3 100

1987 17 244 406 167 230 1,064

1.6 22.9 38.2 15.7 21.6 100

1988 14 206 414 210 217 1,061

1.3 19.4 39.0 19.8 20.5 100

1989 25 167 400 217 240 1,049

2.4 15.9 38.1 20.7 22.9 100

1990 48 144 378 225 221 1,016

4.7 14.2 37.2 22.2 21.8 100

1991 42 146 331 221 185 925

4.5 15.8 35.8 23.9 20.0 100

1992 15 106 306 238 193 858

1.8 12.4 35.7 27.7 22.5 100

1993 12 52 271 263 240 838

1.4 6.2 32.3 31.4 28.6 100

1994 4 55 244 242 247 792

0.5 6.9 30.8 30.6 31.2 100

percentage of all bank failures went from 2.4 percent in 1989 to 40.9 percent in 1991 and to

35.2 percent in 1992. Northeastern bank failures in the early 1990s accounted for substantial portions of the volume of failed-bank assets and of the FDICs bank-failure resolution

costs (see table 10.8). 

Since recently chartered institutions generally fail at higher rates than established

banks, the sizable number of newly chartered northeastern banks (see above, Banking and

Real Estate in the Northeast) contributed to the substantial number of bank failures in the
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 367

Table 10.6

Equity and Reserves to Assets, Nonnortheastern Banks, 19801990

Report Number of Banks/Percentage of Total

Date Equity Capital and Reserves to Total Assets

(Year-end) <5.0 5.07.0 7.09.0 9.011.0 >11.0 Total

1980 88 1,529 5,945 3,787 2,379 13,728

0.6 11.1 43.3 27.6 17.3 100%

1981 108 1,583 5,887 3,701 2,456 13,735

0.8 11.5 42.9 26.9 17.9 100

1982 143 1,648 5,668 3,679 2,656 13,794

1.0 11.9 41.1 26.7 19.3 100

1983 156 1,986 5,437 3,469 2,801 13,849

1.1 14.3 39.3 25.0 20.2 100

1984 145 1,903 5,531 3,438 2,874 13,891

1.0 13.7 39.8 24.7 20.7 100

1985 156 1,736 5,502 3,520 2,900 13,814

1.1 12.6 39.8 25.5 21.0 100

1986 290 2,058 5,256 3,324 2,685 13,613

2.1 15.1 38.6 24.4 19.7 100

1987 364 1,505 5,088 3,296 2,869 13,122

2.8 11.5 38.8 25.1 21.9 100

1988 395 1,311 4,800 3,202 2,844 12,552

3.1 10.4 38.2 25.5 22.7 100

1989 285 1,223 4,539 3,209 2,891 12,147

2.3 10.1 37.4 26.4 23.8 100

1990 218 1,134 4,627 3,038 2,782 11,799

1.8 9.6 39.2 25.7 23.6 100

1991 139 920 4,374 3,184 2,828 11,445

1.2 8.0 38.2 27.8 24.7 100

1992 73 611 3,844 3,543 3,052 11,123

0.7 5.5 34.6 31.9 27.4 100

1993 15 352 3,145 3,771 3,431 10,714

0.1 3.3 29.4 35.2 32.0 100

1994 34 490 2,989 3,331 3,426 10,270

0.3 4.8 29.1 32.4 33.4 100

74 See John P. OKeefe, Risk-Based Capital Standards for Commercial Banks: Improved Capital Adequacy Standards?

FDIC Banking Review 6, no. 1, (spring/summer 1993): 115. De novo bank failure rates are discussed in note 23 of the article.

region.74 During 1991 and 1992 approximately 12 percent of the banks in the Northeast that

had been in existence for five years or less failed annually, compared with an annual failure
An Examination of the Banking Crises of the 1980s and Early 1990s Volume I

368 History of the EightiesLessons for the Future

Figure 10.16

Nonperforming Loans as a Percentage of All Loans,

Northeast versus Rest of U.S., 1982–1990

Northeast

Banks

Banks in

Rest of U.S.

1982 1984 1986 1988 1990 1992 1994

0

2

4

6

8

10

Percent

Figure 10.17

Percentage of Banks with Negative Net Income,

Northeast versus Rest of U.S., 1980–1994

Northeast

Banks

Banks in

Rest of U.S.

Percent

1980 1982 1984 1986 1988 1990 1992 1994

0

10

20

30

40

50

rate of less than 5 percent for all other banks in the region. The large number of mutual savings banks that converted to stock form during the 1980s also contributed to failures in the
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 369

Table 10.7

Bank Failures, 19801994

Northeast as a

Northeastern Percent of

Year Banks All Banks All Failures

1980 1 11 9.1%

1981 3 10 30.0

1982 6 42 14.3

1983 3 48 6.3

1984 1 80 1.3

1985 3 120 2.5

1986 0 145 0.0

1987 4 203 2.0

1988 1 279 0.4

1989 5 207 2.4

1990 16 169 9.5

1991 52 127 40.9

1992 43 122 35.2

1993 3 41 7.3

1994 4 13 30.8

Table 10.8

FDIC Bank-Failure Resolution Costs, 19901994

Losses to FDIC from

Northeastern Failures Percent of Total

Year ($Millions) U.S. Failure Costs

1990 $1,300 45%

1991 5,500 91

1992 2,800 77

1993 192 29

1994 46 22

Northeast. These conversions led to rapid growth and increased risk taking at such institutions. More than 20 percent of the stock savings banks that existed at year-end 198932 of

149failed between 1990 and 1994. Only 8 percent of the mutual savings banks that existed at year-end 1989 failed during the same period.

A major reason for the large number of northeastern bank failures in the early 1990s

was the combination of a regional recession in the late 1980s and a national recession between 1990 and 1991. But each of the recessions was rapidly followed by a regional or national economic recovery; and between 1991 and 1993 the yield curve became very
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370 History of the EightiesLessons for the Future

75 The eight risk factors are loans-to-assets ratio, return on assets, asset growth from the previous year, loan growth from the

previous year, operating expenses to total expenses, average salary expenses, interest on loans and leases, and interest plus

fees on loans and leases. 76 See Chapter 13, Off-Site Surveillance Systems.

favorable, leading to record-high net interest margins for banks. Further, mortgage rates began declining substantially in 1991 and reached a 30-year low in 1993, bolstering the recovery of real estate markets. The drop in mortgage rates led to an increase in first-time

home ownership and a wave of mortgage refinancing, resulting in substantial fees for mortgage lenders. These conditions no doubt helped reduce the number of northeastern bank

failures to only three in 1993 and four in 1994.

As in other regional recessions, the rapid economic decline in the Northeast did not affect all banks in the same way. Even with the large number of northeastern bank failures

(111 between 1990 and 1992), most of the approximately 1,000 banks in the region as of

December 1989 survived the turmoil. The FDIC has conducted research to determine if

there were characteristic differences between the banks that survived and those that failed.

As is shown in Chapter 13, many years before a bank fails, it usually has a riskier operating

strategy than do surviving banks.

To see if this pattern existed in the Northeast, the FDIC researchers studied two cohorts of banks. The first consisted of all northeastern banks that existed in 1986 and either

failed in 1990 or 1991 or never failed. The second cohort consisted of banks that existed in

1988 and either failed in 1992 or 1993 or never failed. To analyze the effect of risky bank

strategies, the researchers used eight financial ratios.75 To assess how varying degrees of

risk affected northeastern banks, they ranked each bank for each financial ratio. Each ranking was then divided into five risk groups, and the failure rate was determined for each

group. For the 1986 cohort, banks in the highest loans-to-assets group had the highest percentage of failure four to five years later10.6 percent. This was 3.8 times as high as the

percentage of failures for the remainder of the banks (see figure 10.18). In the 1988 cohort,

the banks with the highest asset growth had the highest incidence of failure10.1 percent,

3.2 times as high as for slower-growing banks (see figure 10.19). The finding for 1986

that banks in the highest loans-to-assets quintile had the highest failure rateis consistent

with the findings for banks nationwide in that period.76 However, the results for 1988 are

not the same as those for the nation as a whole. As noted above, the large-scale conversion

of mutual savings banks to stock form and their subsequent rapid asset growth was a distinguishing feature of the Northeasts banking environment. Growth rates of converted savings banks in the Northeast were very high, and a disproportionate percentage of these

institutions failed as compared with failure rates in the rest of the country (thus, high growth

rates in 1988 were a better predictor of future failure in the Northeast than they were for

banks nationwide).
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 371

0

3

6

9

12

Percent of Banks in

Highest Quintile that

failed in 1990 or 1991

Percent of Banks in all

other Quintiles that failed

in 1990 or 1991

Note: These three factors represent the two highest risk factors (left and

center) and the lowest risk factor (right) in predicting bank failures.

Figure 10.18

Comparison of Selected Factors in Predicting

Northeastern Bank Failures Four and

Five Years Forward, 1986

Percent

Loans to Assets Asset Growth Loan Growth

10.6%

9.4%

8.5%

2.8%

3.4%

4.4%

77 Most of the franchise of a failed bank, both assets and liabilities, typically remains within the same geographic market after the banks closure. This is because the typical way to resolve bank failures is by selling portions of the assets and liabilities to healthy former competitors in the state. Consequently, one should not infer that failed-bank assets are lost to

these markets.

Data on Bank Failures by State

The impact of the northeastern banking crisis varied depending on the state, but the

adverse effects tended to be fairly concentrated in time, peaking between 1991 and 1992. In

terms of failed-bank assets relative to each states total banking assets, the most severely affected state was New Hampshire: in 1991, 12 banks failed with assets of $5.2 billion (25.4

percent of the states prior year-end assets). Comparable figures were 18.3 percent in Connecticut, 15.2 percent in Maine, and 12.0 percent in Massachusetts. In contrast, an average

of only about 3.0 percent of bank assets failed in the regions other states (New Jersey, New

York, Rhode Island, and Vermont).77
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372 History of the EightiesLessons for the Future

0

3

6

9

12

Percent of Banks in

Highest Quintile that

failed in 1992 or 1993

Percent of Banks in all

other Quintiles that failed

in 1992 or 1993

Note: These three factors represent the two highest risk factors (left and

center) and the lowest risk factor (right) in predicting bank failures.

Figure 10.19

Comparison of Selected Factors in Predicting

Northeastern Bank Failures Four and

Five Years Forward, 1988

Percent

Asset Growth Loan Growth Operating Expenses

10.1% 9.8%

3.2% 3.4% 3.3%

5.7%

Included among the regions bank failures were many of the Northeasts larger banking organizations (see table 10.9). It is noteworthy that in New York and New Jersey, although the percentage of failed-bank assets was relatively small, there were several major

failures, including Goldome ($9.9 billion), DollarDry Dock ($4.0 billion), Seamens ($3.4

billion), and American Savings Bank ($3.2 billion), as well as CrossLand Savings Bank

($7.4 billion) and The Howard Savings Bank ($3.5 billion), as discussed above.

The 1990s northeastern bank-failure experience will perhaps be most remembered for

two events. The first was the failure of the Bank of New England Corporation (BNEC) on

January 6, 1991. (This failure is described in the next section.) BNEC had a significant regional presence through the Bank of New England (Boston), Connecticut Bank and Trust

Co. (Hartford), and Maine National Bank (Portland). BNEC had assets of approximately

$22 billion at the time of its failure, and its resolution cost the FDIC approximately $733

million. The second memorable event was the failure of seven New Hampshire banks on

October 10, 1991. These seven failed banks included four of the states ten largest

(Amoskeag Bank, Dartmouth Bank, Bankeast, and Numerica Savings Bank) as well as
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 373

Table 10.9

Large Northeastern Bank Failures in the 1990s

Resolution Cost as a

Failure Assets Costs Percentage

Institution Date ($Millions) ($Millions) of Assets State

The Seamens Bank for Savings,

FSB 04-18-90 $ 3,392 $189 5.57% NY

Bank of New England Corporation 01-06-91 21,886 733 3.35

Connecticut Bank & Trust Co. 01-06-91 7,211 152 2.11 CT

Bank of New England 01-06-91 13,429 581 4.33 MA

Maine National Bank 01-06-91 1,046 0 0.00 ME

Maine Savings Bank 02-01-91 1,183 6 0.47 ME

First National Bank of Toms River 05-22-91 1,418 132 9.31 NJ

Goldome 05-31-91 9,891 848 8.57 NY

First Mutual Bank for Savings 06-28-91 1,130 181 16.02 MA

Citytrust 08-09-91 1,919 505 26.32 CT

Mechanics & Farmers Savings

Bank, FSB 08-09-91 1,084 323 29.80 CT

Connecticut Savings Bank 11-14-91 1,045 207 19.81 CT

CrossLand Savings Bank 01-24-92 7,432 548 7.37 NY

DollarDry Dock 02-21-92 4,028 357 8.86 NY

American Savings Bank 06-12-92 3,203 470 14.67 NY

First Constitution Bank 10-02-92 1,571 127 8.08 CT

The Howard Savings Bank 10-02-92 3,461 87 2.51 NJ

Heritage Bank for Savings 12-04-92 1,288 22 1.71 MA

Note: Resolution costs are as of year-end 1995.

78 Alan Lavine, Bank of New England Corp. Takes Its Name Seriously with Ambitious Acquisition Strategy in Four States,

American Banker (September 2, 1986), 24; and John P. Forde,  New Bank of New Englands Rosy Prospects, American Banker (December 19, 1985), 3.

three relatively large banks (Nashua Trust Company, New Hampshire Savings Bank, and

Bank Meridian). These seven New Hampshire failures represented approximately 25 percent of the states commercial and savings bank assets.

The Rise and Fall of the Bank of New England Corporation

The new Bank of New England Corp. (BNEC), headquartered in Boston, was

formed in June 1985 after the merger of the old Bank of New England Corp. of Boston

($7 billion in assets) and CBT Corp. (Connecticut Bank & Trust) of Hartford ($6.8 billion

in assets).78 The merger was designed to take advantage of the best features of both institutionsBank of New England Corp.s expertise in real estate lending and CBTs knowledge
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374 History of the EightiesLessons for the Future

79 Alice Arvan, The Regionals That Roar, Bankers Monthly 105, no. 5 (May 1988): 68. 80 Forde,  NewBank of New Englands Rosy Prospects, 3. 81 Lavine, Bank of New England Corp. Takes Its Name Seriously, 23. 82 Forde,  NewBank of New Englands Rosy Prospects, 3; and Lavine, Bank of New England Corp. Takes Its Name Seriously, 24. 83 Lavine, Bank of New England Corp. Takes Its Name Seriously, 24. 84 Arvan, The Regionals That Roar, 68. 85 Alan Wade, Bank of New Englands Woes, United States Banker 98, no. 7 (July 1989): 46; and Arvan, The Regionals

That Roar, 68. 86 Wade, Bank of New Englands Woes, 4849. 87 For the OCCs views on BNE, see Clarke statement, testimony in OCC Quarterly Journal 10, no. 2 (June 1991): 3132.

of retail banking.79 The reaction to the merger was favorable. An analyst at Goldman, Sachs

& Co. said, The new Bank of New England Corp. is a well managed, $14 billionasset

bank holding company located in a booming region.80 James J. McDermott, Jr., an analyst

at Keefe, Bruyette & Woods Inc. in New York, believed that the Bank of New England and

CBT merger was one of the more brilliant strokes in banking. Two strong retail and wholesale markets were merged.81

After the merger, BNEC initiated a growth strategy in which it spent over $1.4 billion,

mostly in stock swaps, to buy leading banks in key economic areas of New England. For example, in December 1985 it completed a merger with Maine National Bank of Portland

(MNB), a $700 million institution.82 These acquisitions helped BNEC grow to $24 billion

in assets within 20 months.83 By mid-1988, BNEC had executed mergers with more than a

dozen institutions and had captured a major share of the New England market, with about

12 percent of domestic deposits and about 19 percent of commercial loans.84 As of July

1989, BNEC had $32 billion in assets, 8 subsidiary banks, and 482 branches in the states of

Connecticut, Maine, Massachusetts, and Rhode Island.85

BNECs spectacular growth ended when problems began to develop in the late 1980s

as the regional economy declined and real estate markets became troubled. By the end of

the first quarter of 1989, BNECs banks had $551 million in nonperforming loans2.2 percent of the banks total loans. The depth of BNECs problems was indicated by Kidder

Peabodys mid-1989 recommendation that its clients sell their stock in the company.

86

The growing financial problems of BNECs banks, especially its lead bank, the Bank

of New England, Boston (BNE), were of increasing concern to the Office of the Comptroller of the Currency (OCC).87 The results of the agencys year-end 1988 examination (completed in May 1989) of BNE and each of its affiliated banks were such that BNE and its

directors consented to a formal agreement on August 10, 1989, to correct deficiencies the

OCC examiners had identified in the banksreal estate lending practices. Beginning in September 1989, the OCC had examiners in BNE on a continuous basis. However, the finan-
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 375

88 Ibid., 32. 89 Geoffrey Smith, Lawrence Fishs Best May Not Be Good Enough, Business Week (October 22, 1990): 9899; and Bank

of New England: Here We Go? Economist 318 (January 12, 1991): 72. 90 Bank of New England: Here We Go? 72; and Clarke testimony, 32. 91 FDIC News Release PR-3-91, FDIC Establishes Three New Banks to Assume Deposits of Bank of New England, N.A.,

Boston, Massachusetts, Connecticut Bank & Trust Company, N.A., Hartford, Connecticut, and Maine National Bank, Portland, Maine, January 6, 1991. 92 Clarke testimony, 3233.

cial deterioration continued, and in late 1989 the OCC began to increase its supervision of

the banks day-to-day operations. 

In January 1990, the chairman of BNEC (who was also chairman of BNE) resigned

after the corporation announced that its constituent banks had lost $1.1 billion in 1989. On

January 22, 1990, BNE found it necessary to borrow $225 million at the Federal Reserves

discount window in order to meet its immediate liquidity needs. On February 26, 1990,

BNE and its directors consented to a cease-and-desist order with the OCC; the order served,

among other things, to prevent further dissipation of the banks assets. The OCC executed

similar cease-and-desist orders in April and May with, respectively, CBT and MNB and

their directors.88

Despite the efforts of a new management team to improve performance, BNE lost another $80 million in the first half of 1990; and by year-end 1990, $3.2 billion, or 20 percent,

of BNECs loans were nonperforming.89 On January 4, 1991, after BNEC announced that it

expected a $450 million fourth-quarter loss that would render both the holding company

and BNE technically insolvent, depositors mobbed BNEs branches and withdrew $1 billion.90 On Sunday, January 6, 1991, the OCC formally declared BNECs three major banking unitsBNE, CBT, and MNBinsolvent and appointed the FDIC as receiver. On the

same day the FDIC announced that (1) the OCC had chartered three new bridge banks (New

Bank of New England, N.A., Boston; New Connecticut Bank & Trust Company, N.A.,

Hartford; and New Maine National Bank, Portland) to assume the assets and liabilities of

the three insolvent banks; (2) the bridge banks would be open for business as usual on Monday, January 7, 1991; and (3) all deposits of the three insolvent banks would be protected,

even those over the $100,000 insured limit.91

The insolvencies of CBT and MNB were triggered by the failure of BNE. Because of

BNEs insolvency, CBT was unable to recover $1.5 billion in federal funds it had loaned to

BNE. The FDIC charged the resulting loss against the capital accounts of CBT, with the result that CBT had an equity capital deficiency of $49 million.92 The OCC then declared

CBT insolvent and placed it in receivership. Furthermore, under the cross-guarantee provision contained in the Financial Institutions Reform, Recovery, and Enforcement Act of

1989 (FIRREA), the FDIC demanded immediate payment from MNB of an amount equal
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376 History of the EightiesLessons for the Future

93 The cross-guarantee provision of FIRREAprovides that an insured depository institution can be held liable for any loss that

the FDIC expects to incur in connection with the default of a commonly controlled insured depository institution. 94 FDIC News Release PR-61-91, FDIC to Sell Bank of New England Franchise to Fleet/Norstar, April 22, 1991; Barbara

A. Rehm, How the Acquisition by Fleet Will Work, American Banker (April 24, 1994), 8; and Milligan, KKR, Member

FDIC, 59. 95 U.S. House Committee on Banking, Finance and Urban Affairs, Failure of the Bank of New England: Hearing, 102d

Cong., 1st sess., January 9, 1991, 150 (comments by various members of the committee and by Mr. Seidman and Mr.

Clarke). 96 FDIC, Systemic Risk (Too Big to Fail) (unpublished paper), 1995, 7.1-1 to 7.1-5. For additional information, see Chapter 7. 97 U.S. General Accounting Office, Bank Supervision: OCCs Supervision of the Bank of New England Was Not Timely or

Forceful (GAO/GGD-91-128, September 1991), 1. 98 Ibid, 22.

to the FDICs expected loss as receiver of BNE.93 When MNB was unable to make the payment, the OCC declared it to be insolvent and placed it in receivership. This was the first

time the cross-guarantee provision of FIRREA had been used to close a bank.

On April 22, 1991, the FDIC announced that the three bridge banks would be acquired

by Fleet/Norstar Financial Group, Inc., of Providence and investment managers Kohlberg,

Kravis, Roberts & Co. (KKR). Fleet agreed to raise $683 million in capital for the banks

within three months; KKR would provide $283 million, and the bank planned to raise the

remaining $400 million in stocks and bonds. The participation of KKR as a partner with

Fleet/Norstar in the acquisition of the three bridge banks was the first time that a nonbank

financial buyer participated in the purchase of a failed commercial bank. KKRs involvement not only allowed capital to enter the banking industry from nonbanking sources but

was also expected to increase the number of potential bidders in future bank failures.94

The decision to protect all deposits of the three BNEC banks again focused attention

on the too-big-to-fail bank disposition policy. During congressional hearings held on January 9, 1991, many members of the House Banking Committee had expressed the view that

paying depositors of large institutions in full was not only unfair to those with deposits in

small banks but also undermined depositor discipline.95 FDICIA consequently included

provisions making it more difficult for bank failures to be resolved in ways that would protect uninsured deposits.96

After the failure of the BNEC banks, the chairman of the Senate Banking Committee

asked the U.S. General Accounting Office (GAO) to review the factors that had caused the

failure. The 1991 GAO report noted that between 1985 and 1989, the assets of BNEC banks

grew from $7.5 billion to $32.6 billion, primarily through aggressive acquisitions and increased real estate lending.97 The GAO believed that this expansion should have caused the

OCC to conduct a thorough and aggressive examination early in the period to assess the potential adverse affects of both BNECs rapid growth and its concentration in commercial

real estate lending.98
Chapter 10 Banking Problems in the Northeast

History of the EightiesLessons for the Future 377

99 Ibid, 5. 100 Ibid, 1315. 101 Loans were issued with favorable terms, such as 100 percent financing, no collateral except the development project on

which the loan was made, and interest-only payments for a number of years. 102 U.S. GAO, OCCs Supervision of the Bank of New England, 38. 103 Bank of New England: Here We Go? 70, 7273. 104 Laura Jereski, A Stomachache for the Bank That Ate New England, Business Week (February 5, 1990): 6869.

The GAO report also pointed out that during BNECs high-growth years OCC examiners repeatedly identified and reported problems with BNEC banks controls over lending

operations and strategies, but not until 1989 did the OCC take enforcement action to compel corrective measures.99 For example, the OCC found that over half of the commercial

real estate loans reviewed at BNE during the December 1987 examination were 100 percent

financed and that nearly half of the loans reviewed had inadequate or stale credit information on borrowers, but the agency generally relied on BNEC managements assurances that

it would address problems such as these.100

The GAO concluded that the BNEC banks failed as a result of their liberal lending

practices, poorly controlled growth, and concentration in commercial real estate loans in a

severely declining regional economy.

101 The GAO findings indicated that the OCC had

failed to take timely and forceful supervisory actions to compel BNEC to correct problem

areas before they adversely affected capital adequacy. Although the GAO could not say

with certainty that close supervisory scrutiny would have saved BNECs banks, the agency

did believe that more vigilant supervision could at least have reduced losses.102

Although the new Bank of New England had been established with great expectations in 1985, by early 1991 it was the countrys third-largest bank failure (after First RepublicBank Corporation and Continental Illinois). BNECs aggressive lending practices

had produced a large concentration of real estate loans, and when New Englands construction boom faltered, BNEs loan book was reduced to rubble.103 There were other factors

in BNEs collapse. Former executives, competitors, and customers told a tale of confused

and haphazard management. Lines of authority and responsibility were blurred, lending

standards were often lax, and numerous unwise real estate loans were made. It was reported

that the former chairman had personally courted large real estate developers and, in an effort to complete a transaction, sometimes offered bargain-priced loans without seeking any

collateral. Some former executives alleged that the chairman had often made such loans

without even consulting his lending officers.104 While these activities were certainly examples of poor bank management, they were not illegal. In fact, it was reported the chairman was not only allowed to retire rather than resign, thereby becoming eligible for lifetime
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378 History of the EightiesLessons for the Future

105 Jed Horowitz, Grapevine: That Connolly Chute,  American Banker (January 31, 1990), 4.

retirement benefits of approximately $1 million a year, but was also offered a severance

package worth several million dollars.105

Conclusion

The banking problems in the Northeast in the 1980s and early 1990s were associated

with the third in a series of four rolling regional recessions that had been preceded by speculative booms (the first two were in the farm belt and the Southwest; the fourth was in California). The Northeasts regional problems were exacerbated by the national recession that

took place during 199091. With respect to banking problems, the most important element

of the regions boom was real estateparticularly commercial real estate. Expecting a continuation of the substantial gains that accompanied the building boom of the mid-1980s, numerous banks throughout the region lent aggressively into projects that, in many cases,

became increasingly marginal, especially as the economy worsened. As in the Southwest,

vacancy rates shot up and many real estate loans made during the boom turned into problem loans. Although many observers believed that the Northeasts diversified economy

would cushion the region against a Texas-style collapse, that assessment proved inaccurate.

As had been the case in the farm belt and in the Southwest, the end of the boom led to significant numbers of bank failures. In 1989 only five banks failed in the region, but two years

later, in 1991, the number had risen more than tenfold to 52. Also like the Southwest, the

Northeast experienced a number of large-bank failures. In the New York area, several large

savings banks failed, including Goldome, CrossLand, and DollarDry Dock. The most notable failure was undoubtedly that of the Bank of New England in January 1991, the resolution of which created pressure for legislative action to deal with the too-big-to-fail

issue; Congress responded with FDICIA.

One important element of the banking problems in the Northeast was peculiar to the

region: the presence of large numbers of mutual savings banks that converted to stock form

during the period. Between 1985 and 1990, approximately 40 percent of all the mutual saving banks in the region as of year-end 1984 took this course. Converted institutions experienced significant increases in capitalization and therefore increased their loan growth in

order to sustain returns on equity. Many of these savings banks had concentrated on traditional residential real estate lending, but upon conversion they pushed into unfamiliar commercial real estate in new geographic markets where their managements had little

experience. Converted savings banks therefore became a uniquely northeastern element in

the series of boom-to-bust cycles that had occurred in the Midwest and the Southwest in the

middle to late 1980s and would occur once more, in California in the early 1990s.