Date: 1987-05-05
Speaker: ST GERMAIN (democrat)
Chamber: H

Mr. Chairman. H.R. 27 is a recognition of the serious drain on the Federal Savings and Loan Insurance Corporation [FSLIC] from its attempts to deal with the problems in the savings and loan industry. FSLIC needs additional funds as soon as possible. The condition of the thrift industry has placed severe strains on the Federal Home Loan Bank BoardsBank Boardresources and the FSLIC insurance fund. Although estimates differ as to the amount of new funds FSLIC needs. there is no disagreement that new funding sources are necessary to supplement the current deposit insurance base. A comparison of FSLICs insurance fund balance and the current cost of resolving known troubled institutions alone indicates that financial resources other than those FSLIC has traditionally depended on are necessary. The Bank Board is now closely monitoring 351 troubled institutions with total assets of $117 billion The Bank Board estimates that these institutions have net operating losses of nearly $10 million a day or $3.6 billion per year. FSLIC losses resulting from assistance it has provided to institutions have increased dramatically. from $23 million in 1980 to $10.8 billion in 1986. Recognizing the Importance of establishing a funding mechanism to shore up the FSLIC fund. H.R. 217 provides up to $5 billion to FSLIC over a 2year period. The funding mechanism. which will have no impact on the budgetary process. will be accomplished by an initial funding from the Federal Home Loan Banks and then through the sale of bonds in the private markets. However. as was stated last Tuesday in a joint statement by Speaker WExGHT and myself. continued monitoring of the problems in the industry argues convincingly that the situation requires a $15 billion recapitalization plan over 5 years. thereby providing the long range confidence needed in the industry. In fact. just yesterday the General Accounting Office [GAO] stated that as of December 31. 1986. FSLIC was insolvent by $6 billion. During hearings in March. GAO testified that a negative net worth of $3 billion was expected at that stage of their audit. Therefore. I will offer an amendment providing for new funding for FSLIC in the amount of $15 billion over 5 years. with an annual cap for new financing of $3.5 billion. The bill includes a provision for sunset of the funding mechanism by a joint resolution and a provision that the $3.5 billion ceiling be raised under emergency conditionsagain by Joint resolution. In addition to the funding mechanism. the legislation contains several other key elements: First. the bill includes a forbearance program for wellmanaged institutions operating with Impaired capital levels in designated economically depressed areas. By "wellmanaged" the committee does not include those institutions whose managers are incompetent or where insiders have engaged in fraud or other criminal activity. I thought this point was clear but some have chosen to falsely interpret the forbearance provisions as a method of keeping all institutions open. Frankly. that kind of distortion does not belong in a debate of this importance. Relief granted under the bills forbearance provisions also applies to those institutions which have loan participations with troubled thrifts. even though the former may not be located in an economically depressed area as defined by this legislation. Second. the bill requires each Federal Home Loan Bank to establish an appeal process by which aggrieved institutions and borrowers can obtain timely review of regulator actions by "outside experts." Third. the bill provides that the committee will periodically review and evaluate FSLICs performance over the next several years. The review and evaluation will focus on how FSLIC spends the funds. which institutions it closes. what type of assistance and forbearance it provides. and whether its personnel and funding resources are adequate. I should add here that many Members are reluctant to grant FSLIC the authority to raise $15 billion. Their concern is that FSLIC. flush with new money. will act to close many of the institutions that have negative net worth. especially smaller institutions. I want to assure those Members that the committee will insist on full and comprehensive reports from the Bank Board detailing their activity. The committee is required to review the Bank Boards reports. conduct other oversight activities as necessary. and then report its findings to the House as a whole. Rest assured. the committee will indeed be vigilant. and if significant changes in FSLICs conduct are warranted I will not hesitate to recommend them. Fourth. finally. the bill provides for an exit fee for institutions leaving FSLIC. H.R. 27 recognizes that the problems experienced by some insured institutions are due in part to economically depressed conditions in certain areas of the country. The bill includes a number of strong forbearance provisions designed to help institutions and borrowers in economically depressed areas. It allows wellmanaged savings and loans and borrowers adequate time to develop business plans. to restructure portfolios. and to acquire additional capital all under the -careful supervision of the Bank Board. In addition. H.R. 27 encourages institutions to work with troubled borrowers by reaffirming that generally accepted accounting principles should be used to permit loan restructuring without loss recognition where appropriate. Mr. Chairman. the committee has sought to achieve a balanced approach. taking into consideration the many competing concerns and issues involved in H.R. 27. We believe that the bill. as it will be amended. is an appropriate compromise. giving FSLIC the funding mechanism for raising $15 billion in new capital but at the same time recognizes the concerns of insured institutions and borrowers seeking fair and equitable treatment from the Bank Board. H.R. 27 Includes forbearance provisions. yet it also preserves the regulatory independence of the Bank Board. In this regard. I would like to clear up some ambiguity that has arisen pursuant to the forbearance provisions in title II. While capital forbearance standards are set forth in section 202. such forbearance will be granted only for those wellmanaged institutions whose capital position has been affected by loans made in economically depressed regions. Clearly. this is forbearance for economic reasons. and in no way restricts the rights and supervisory duties of regulators to uncover and correct any fraud. criminal activity and managerial incompetency. We expect the Bank Board and FSLIC to do no less than this in fulfilling their supervisory responsibilities in this regard. Mr. Chairman. the bill we have before us today represents the beginning of what is to be a longterm process with the overall goal of restoring the thrift industrys trust in its regulator. of rebuilding the publics confidence in the deposit insurance fund. and preserving those wellmanaged depository institutions dedicated to home ownership financing.