Banking's Crumbling Image

Bad loans are causing big troubles for America 's financial industry

Banks and bankers have long been considered the bedrock of American business. The sober executives dressed in dark blue and talked in hushed tones, as befitted their serious calling. Their judgment was considered Solomonic, and their financial institutions were believed to be as solid as the vaults in which their cash was stored.

No more. A surprising number of American bankers are now winning a reputation for bad loans, poor decisions and weak management. In the past six months, 22 banks have failed, and last week two major U.S. banks announced large second-quarter losses. It was the first time since World War II that one of the top ten American banks had suffered a three-month loss. New York's Chase Manhattan reported that it lost $16.1 million between April and June, while the figure for Chicago's Continental Illinois was $60.9 million during the same period.

The U.S. banking industry is by far the safest and soundest in the world. Deposits in the more than 14,000 institutions belonging to the Federal Deposit Insurance Corporation are guaranteed by the Government for up to $100,000 for each account. Since the FDIC program was established in 1934, 578 member banks have gone out of business for one reason or another, but no depositor has ever lost a penny in an insured account.

Even so, people are growing edgy about whether their deposits are still as safe as money in the bank. In recent months, newspaper reports of financial strains on local banks and savings and loan associations have brought crowds of agitated depositors into bank lobbies to withdraw their funds from cash-squeezed institutions in Miami, Hartford, Conn,, Abilene, Texas, and a number of other towns and cities. A recent survey by Burke Marketing Research Inc. of Cincinnati showed that nearly 90% of Americans questioned now have some concern about the stability of U.S. financial institutions. Only about 10% feel any real confidence in the present banking climate.

Figures released by the FDIC last week give grounds for worry. Since January the agency's problem list of state and national banks with significant financial difficulties has increased from 223 to 268, the largest number since the aftermath of the 1973-75 recession.

On Wall Street, investor jitters have sent the industry into a slide, dropping share prices of a number of big money-center banks, including Chase Manhattan and Chemical Bank, to an average of only four times earnings. That is roughly the price-earnings ratio of the severely depressed oil drilling industry.

The woes of banks have largely been caused by the combination of high interest rates and an economy that shows little sign of recovering from almost three years of stagnation. Last week the Commerce Department reported that the U.S. gross national product grew during the second quarter at an inflation-adjusted annual rate of 1.7%. Yet at the same time, the Government also sharply scaled back an earlier GNP estimate for the first quarter, reporting that the economy actually sank 5.1% on an annual basis during the January-to-March period instead of the initially estimated 3.7%. Moreover, the Bureau of Labor Statistics last week announced that consumer prices rose during June at a compound annual rate of 13.3% for the second month in a row.