Date: 1982-05-20
Speaker: ST GERMAIN (democrat)
Chamber: H

Mr. Chairman. the (lanking Committee has been concerned for almost 2 years with the growing difficulties encountered by financial Institutions. Deregulation. technological change. and severe dislocation in the economy created an environment which threatens the stability of our financial service delivery system. Particularly telling was the rapid rise and subsequent volatility of interest rates. Thrift institutionssavings and loan associations. mutual savings banks. and other depository institutions emphasizing savings accountstraditionally relied on consumer deposits which were relatively stable. The funds were placed in the accounts as a source of savings rather than as a mechanism for payment of immediate expenses. This stability allowed those depository institutions to lend funds with a much longer maturity or repayment date than the underlying deposit. For most of these institutions. the major purpose of the loans was to finance residential real estate. As a result these institutions became major providers of longterm mortgage money for home purchasers. The climb in interest rates and the volatility of those rates helped to bring an end to this traditional method of operation. Consumers have become more aware of the possibilities of earning higher returns on their funds. As a result. deposits which were once reasonably stable have become less reliable sources of funding for longterm loans. The small saver can now shop around for higher returns coupled with liquidity much as corporate and financially sophisticated individuals have done for many years. In addition. concern for the safety of their funds caused many depositors to move funds out these institutions. This creates the silent run which is affecting the Nations thrift institutions. Deposit withdrawals are exceeding new deposits flowing into these institutions. In an effort to keep deposits and other lendable funds. thrift institutions and other depository institutions have had to increase the interest they pay on their deposits. This has had the effect of drastically raising the cost of funds for the institutions. At the same time this rise in cost was occurring. however. the return those institutions received on their assets moved upward only slightly. By 1981. therefore. these institutions had a negative spread between their cost of funds and the return on their mortgage portfolios and by early 1982 the overwhelming majority to the Nations thrift institutions were experiencing operating losses. These losses are absorbed by the institutions by dipping into their net worth or capital accounts. Net worth or capital is an item on the balance sheet of depository institutions which represents retained earnings and the value of any equity or stock issued by the institution. It is designed to provide a cushion for the institution to absorb operating losses or losses incurred by loans which go into default. The earnings squeeze affecting the industry is causing a major rundown of the industrys net worth. Last year the Nations savings and loans and mutual savings banks lost over $5 billion. This year the losses are expected to be substantially higher. As a result. the erosion in net worth has led to serious concern over the future stability of these institutions. On February 23 I introduced H.R. 5568. the Home Mortgage Capital Stability Act. That legislation was prompted by the growing realization that economic conditions. especially very high interest rates. now adversely affected a substantially larger number of institutions than earlier in the Congress and the belief that it is in the na* tional interest to preserve a mortgage lending industry. Comprehensive hearings were held on the provisions of H.R. 5568 under the auspices of the Subcommittee on Housing and Community Development. Based on those hearings revised legislation was introduced on May 3. 1982. That bill. entitled the Net Worth Guarantee Act. was adopted by the Subcommittee on Financial Institutions Supervision. Regulation and Insurance by a rollcall vote of 19 ayes to 3 nays on May 4. 1982. The full committee on May 11. 1982 ordered the bill. as amended. reported by a rollcall vote of 25 ayes. 15 nays. and 3 present but abstaining. The act would establish a program to guarantee the net worth of qualifying depository institutionssavings and loans. mutual savings banks. commercial banks. and credit unions. The program would be administered by the Federal Home Loan Bank Board. the Federal Deposit Insurance Corporation. and the National Credit Union Administration Board. Any guarantees provided pursuant to the act would be backed by a net worth guarantee account established in the Treasury and would be subject to an $8.5 billion guarantee limit. The act would provide that the full faith and credit of the United States stands behind the obligation to pay any guarantee which has to be honored and authorizes the appropriation of such sums as might be necessary for this program. subject to the $8.5 billion guarantee limit. and without restriction as to fiscal year.