Bankers Denounce Great Western Plan to Switch to FDIC : Move Would Give Big Thrift Unfair Advantage, Group Says

WASHINGTON — The American Bankers Assn. on Tuesday announced its strong opposition to Great Western Financial’s plan to drop out of the imperiled federal savings and loan insurance fund and join the healthier bank fund.

“We cannot stand idly by and watch a major competitor like Great Western become a bank and have a superior charter to commercial banks,” said Ed Yingling, the ABA’s government relations director.

If Great Western’s application is successful, it would have the advantage of bank insurance but also would be able to deal in securities, real estate and insurance, businesses now forbidden to banks, according to Yingling.

If Great Western became a bank and switched directly to the Federal Deposit Insurance Corp., which insures bank deposts up to $100,000, it would have to get a bank charter. That would mean giving up the additional powers granted savings and loan firms.

Opposition From Bankers

However, Great Western is not applying to become a bank. Instead, it is proposing a merger with a small subsidiary in Washington state that is already under the FDIC umbrella. Therefore, under the merger, Great Western, in effect, would become part of a bank without surrendering its thrift powers.

From the bankers’ viewpoint, Great Western would then become an unfair competitor.

The ABA said: “If Great Western is allowed to convert to FDIC insurance, the result will be an institution which: calls itself a bank; has FDIC insurance; will be regarded by its customers as a bank, and yet can offer (directly or through affiliates) products and services that are impermissible for commercial banks and their affiliates.”

Great Western would become a hybrid bank-thrift that would be frightening to commercial bankers. “Great Western is no small competitor in its markets; it has over $30 billion in assets,” the ABA noted pointedly in a strongly worded letter to key regulators involved in the proposed switch.

The letter went to William Seidman, chairman of the FDIC, and M. Danny Wall, chairman of the Federal Home Loan Bank Board, which, through its Federal Savings and Loan Insurance Corp. arm, insures deposits up to $100,000 at S&Ls.;

In response to the ABA’s protest, Great Western Senior Vice President Ian Campbell said: “It’s unfortunate we didn’t have an opportunity to discuss it with them (the ABA) before they filed this objection.

Major Savings

“It is ludicrous to imagine that our departure from the FSLIC will have a significant effect on the health of that fund. Our $40 million a year in deposit insurance payments is significant for our stockholders but a drop in the ocean for the needs of the FSLIC.”

“The implication is that somehow Great Western is doing something unusual. All we are doing is what a large number of New York and Washington savings banks have been doing for a decade.

“There is a longstanding tradition for these large institutions to operate as federal savings banks. They have thrift charters and thrift powers but have FDIC insurance. This is not breaking new ground. All the major new New York savings banks, which are thrifts, have FDIC insurance. There is no new competitive threat here.”

For the healthiest S&Ls; such as Great Western, a switch to the bank insurance fund has big advantages. S&Ls; pay high premiums to their insurance fund to help prop up the troubled segment of their industry.

A shift to the FDIC bank fund would save Great Western, which has 263 branches in California, Arizona and Florida, at least $27 million a year, Chairman James Montgomery said last month when the Beverly Hills firm announced its plans to switch.

Neither FSLIC nor FDIC has indicated when it will rule on the application. But the issue goes far beyond the individual case of Great Western. If the big S&L; is successful in changing its insurance protection, it could set a pattern for other large, healthy thrifts anxious to bail out from an already-troubled fund.

‘Undermine Confidence’

The FSLIC fund, burdened by the need to deal with a raft of insolvent institutions, has a negative net worth: Its debts exceed its assets by $13 billion.

FDIC, by contrast, has a positive net worth of $18 billion.

If Great Western is allowed to switch, the bankers association said in its letter to the federal regulators, “public confidence in the thrift insurance fund will be further undermined, particularly in view of widespread speculation that other large thrifts will seek to follow Great Western’s example.”

The banking industry “has been struggling to obtain the right to offer the products and services that our competitors in the financial service industry can offer,” the ABA said in its letter.