Managing the Crisis: The FDIC and RTC
Experience Chronological Overview: Chapter Sevenó1984
Bank failures in
1984 climbed to a new post-Depression record of 78. For the first time in
history of deposit insurance, provisions for insurance losses exceeded annual
deposit insurance assessments.
Deposit Insurance Fund Balance
as a Percent of Insured Deposits
number includes $40 billion from Continental. If Continental's
assets were excluded, the dollar amount would be $3.4 billion and
the percentage change would be -51.67 percent. Back
FDIC, 1984 Annual Report and Reports from FDIC Division of
Finance and Division of Research and Statistics.
The single biggest event of the year was the
rescue of Continental Illinois National Bank and Trust Company
(Continental), Chicago, Illinois. Having suffered large losses
resulting from loans purchased from the failed Penn Square
Bank, N.A., Oklahoma City, Oklahoma, Continental experienced
severe financial difficulties throughout 1983. A permanent
assistance plan put together by the FDIC required certain top
management changes with multi-tier corporate restructuring,
included the sale to the FDIC of problem loans with a face
value of $5.1 billion for a price of $4.5 billion and a capital
infusion from the FDIC of $1 billion in return for two permanent,
nonvoting preferred stock issues.
In 1984, Gross Domestic Product (GDP) growth continued
to increase as did employment growth. GDP was up 6.8 percent over the year,
and employment increased by 5 percent.7-1 The unemployment rate dropped
to 7.5 percent.7-2 Inflation also was down,7-3 but interest rates increased
slightly. The discount rate was 8.8 percent, and the 30-year mortgage rate
was 13.9 percent.7-4 Over the year, home
sales and housing starts increased, but not as rapidly as in 1983. Sales
were up 4.5 percent, and housing starts
increased 2.7 percent. Continued commercial lending was pushing up the
office vacancy rate to 14.6 percent for the year.7-5
Nationally, farm debt (total
liabilities for agricultural businesses) peaked at $207 billion in 1983,7-6
and agricultural economic and financial problems
led to an increase in agricultural bank failures in 1984. Twenty-five agricultural
banks failed in the year, 31 percent of the country’s total number of
failed banks. Bank failures in the midwest also increased due to the downturn
of the agricultural industry. Eleven banks failed in the midwest in 1983 compared
with 31 in 1984; the majority of which were designated agricultural banks.
The number of newly chartered
banks reached a peak, with 402 institutions chartered in 1984. Despite the
problems with the agricultural banks, 180 new
banks were chartered in the Southwest alone in 1984. Many of those charters
had a high concentration of Commercial and Industrial loans. The Southwest
continued to experience problems in the agricultural and oil sectors, and regional
banks were beginning to experience problems stemming from those faltering industries.
The real estate market in the Southwest, however, was still healthy, and the
value of commercial real estate permits rose 8 percent over the year.7-7 Much
of the money from the profitable oil industry of the late 1970s and early 1980s
was being invested in real estate development by those who believed that oil
prices would rise again in the near future. Across the region there was a large
increase in commercial real estate loans, totaling almost 8 percent of total
assets, well above the national median of just under 5 percent.
The Northeast was still
seeing high employment and high Gross State Product growth rates.7-8 A
regional four-year boom in housing prices began with Boston residential real
prices up 21 percent over the year.7-9 The
housing price boom was coupled with a substantial increase in personal income
during the same period.7-10
The conversion rate of mutual savings banks to the stock form of ownership
started increasing dramatically. Those banks had strong incentives to expand
loan portfolios rapidly in order to leverage high initial capital positions,
increase earnings per share, and meet stockholders’ expectations.
In the banking industry as a whole, bank failures and the number of problem
banks were up. During the last quarter of 1984, defaulted agricultural loans
became a significant factor in the number of failures. Agricultural banks (commercial
banks in which agricultural loans comprise 25 percent or more of total loans)
had been experiencing escalating difficulties. By the end of the year, 37 percent
or 314 of the FDIC’s list of 848 problem banks were agricultural banks.
In fact, during the last four months of 1984, agricultural banks accounted
for 71 percent of the banks that failed in that period. The 848 banks on the
FDIC’s problem bank list represented an increase of 206 over 1983’s
end of the year total of 642.
Table 7-2 shows the number and total assets of FDIC insured institutions,
as well as their profitability as of the end of 1984.
Financial Institutions Insured by FDIC
($ in Billions)
Commercial Banks - FDIC
Savings Banks – FDIC
Return on Assets
Return on Equity
Associations – FHLBB Regulated
Return on Assets
Return on Equity
Percent change is not provided if either the latestperiod or the year-ago
period contains a negative number
Source: Reports from FDIC Division of Research and Statistics.
Bank Failures and Assistance to
There were 78 commercial bank failures in 1984 – the
largest number of insured bank failures in any year since the FDIC was founded.
There also was one assisted merger of a mutual savings bank and one assisted
merger of a commercial bank. Tennessee alone experienced 11 bank failures.
Three of those banks were part of the chain controlled by Jake and C.H. Butcher,
Jr. A total of eleven banks controlled by the Butchers failed during 1983
The FDIC resolved 62 failed banks in 1984 through purchase and assumption
(P&A) transactions. Twelve failed banks during 1984 were handled through
insured deposit transfers (IDT). In eight of those, the FDIC paid advance dividends
to uninsured depositors and other claimants amounts ranging from 40 percent
to 75 percent of uninsured claims. The FDIC used the deposit payoff method
in four bank failures in 1984, because neither P&A nor IDT transactions
with assuming banks were possible. In three of the four payoffs, the FDIC paid
advance dividends to uninsured depositors and other creditors of the failed
In addition to the assistance
provided to Continental in 1984, the FDIC assisted the merger of Orange Savings
Bank, Livingston, New Jersey, into Hudson City Savings Bank, Paramus, New
Jersey. Pursuant to its Voluntary Merger Plan, the FDIC advanced $26 million
to Hudson City Savings, and under the assistance agreement, repayment of
$16 million of the assistance was contingent upon the resulting bank’s
At the end of 1984, 23 depository institutions had net worth certificates
outstanding totaling $578.8 million. At the end of 1983, the depository institutions
with such certificates held $376.8 million in certificates.
A recent estimate of losses per transaction type is shown in Table 7-3.
1984 Losses by Transaction Type ($ in Millions)
Percent of Assets
Source: Reports from FDIC Division of Research and Statistics.
Payments to Depositors and Other Creditors
of Continental, 79 banks that failed or were assisted had total deposits
of $2.7 billion in 532,448 accounts. Insured accounts at Continental totaled
slightly more than $3 billion; uninsured depositors and other private creditors
held over $30 billion in claims. All deposits at Continental, however, were
protected as it was assisted and did not fail. In the four payoffs, there
were 25,196 deposit accounts with $378.7 million in total deposits.
Of the 748 banks7-11 that
failed since the FDIC’s inception in 1934, P&A
transactions and assistance agreements were used for 404 failures, and deposit
payoffs were used to resolve another 344 banks, including 14 IDTs. Since January
1, 1934, 800,000 depositors with total deposits of $2 billion were involved
in payoff cases.
Total disbursements by
the FDIC through 1984 amounted to $13.3 billion. Of that amount, the FDIC
recovered $9.8 billion, for a net loss of $3.5 billion.
the beginning of 1984, the FDIC held $4.3 billion in assets from failed banks.
There were 78 bank failures in 1984, with total assets of $2.9 billion. The
FDIC’s inventory of assets in liquidation in 1984, exclusive of assets
of Continental, climbed to 121,000 assets with a book value of $5.2 billion.
The FDIC acquired approximately 800 assets from Continental with a book value
of $5.1 billion. Combined total assets for liquidation at the end of 1984
were $10.3 billion, which represented an increase of more than double the
amount of assets held at the beginning of the year.
During the mid-1980s, the FDIC’s asset marketing efforts were focused
on performing loans of all types and sizes; particularly those collateralized
by real estate. As the workload increased, the FDIC’s efforts began to
focus on the sale of nonperforming loans, particularly those with small balances.
That occurred for several reasons. In many cases, smaller loans were as time-consuming
to work as loans with much higher book values and greater sources of recovery
to the FDIC. Although small loans made up the vast majority of the loans held
by the FDIC, their total value represented a small fraction of the value of
receivership portfolios. By accelerating the disposition of those small loans,
FDIC account officers were able to focus on larger credits that offered higher
recovery levels. Table 7-4 shows the FDIC’s assets in liquidation and
Chart 7-1 shows the asset mix.
1984 FDIC End of the Year Assets in Liquidation ($ in Billions*)
Revenues and the insurance fund increased
during 1984 despite a record number of bank failures. Revenues
included $1.5 billion on investments and U.S. Treasury obligations
and $1.3 billion in assessments from insured banks. The fund
reached a new high of $16.5 billion, an increase of $1.1 billion
over 1983. That was an increase of 7.1 percent. Total gross expenses
and losses for 1984 were $1.3 billion.
Total FDIC staffing was 5,076 by the end of the year, an increase
of 1,230 or 31.98 percent over 1983. Of the 5,076 total, 2,158
were in the Division of Liquidation and 1,800 were in the Division
of Bank Supervision (DBS). That was the fourth straight year that
DBS staffing decreased. Chart 7-2 shows the staffing levels for
the past five years.
thrift industry growth reached a peak as the number of insured thrifts
grew 20 percent, compared with 4 percent growth for commercial banks. Arizona,
Texas, and California led the industry with growth rates of 47 percent,
38 percent, and 30 percent, respectively. Generally, individual thrifts
that experienced rapid growth were expanding with greater risk assets (commercial
real estate loans, land loans, and direct equity investments), while simultaneously
relying on more costly and volatile funding sources (large time deposits,
repurchase agreements, and other liabilities). The peak number of thrifts
converting from mutual to stock ownership also occurred in 1984. Overall,
the Federal Home Loan Bank Board encouraged such conversions,
which were considered one way of bringing in new capital to the industry.
The Federal Savings
and Loan Insurance Corporation (FSLIC) also was busy in 1984 handling
troubled thrift institutions. Two methods of resolution used were the
Assisted Merger and the Supervisory Merger. By the end of 1984, 9 liquidations
and 13 Assisted Mergers had occurred, costing FSLIC a total of $743
million. There were also 14 Supervisory Mergers, and the FSLIC fund
at $5.6 billion.
Assisted Merger was the most popular form of FSLIC resolution, since
it deferred FSLIC cash payments. An acquirer would assume all (or nearly
all) the assets and liabilities of a failed thrift and would receive
from FSLIC. Major components of assistance included capital loss coverage
and yield maintenance on troubled assets. In a Supervisory Merger,
supervisory authorities would encourage a weak thrift to merge with
a healthier thrift,
with no direct financial assistance from FSLIC.
of Economic Analysis, Department of Commerce and CB Commercial Torto/Wheaton
7-2 Bureau of Labor Statistics,
Department of Labor. Back
7-3 Bureau of Labor Statistics,
Department of Labor. Back
7-4 Housing Market Statistics,
National Association of Home Builders (June 1996), and Federal Home
Loan Mortgage Corporation. Back to text
7-5 Housing Market Statistics,
National Association of Home Builders (June 1996), and CB Commercial
Torto/Wheaton Research. Back
E. Case, “The Real Estate Cycle and the Economy: Consequences
of the Massachusetts Boom of 1984-87,” New England Economic Review
(September/October 1991), 37-39. Back to
figure does not include five open bank assistance transactions from
1934-1980. The FDIC did not begin including assistance agreements with
the failures for reporting purposes until 1981. Five assistance agreements,
with total deposits of $6.8 billion, should be included in the overall
totals. Back to