Taken to Task

Regulators rap two big banks

The problems in the banking industry these days emerge one after another like the details in a messy scandal story. Moneymen have almost resigned themselves to new disclosures about bad loans and questionable practices at banks that were once considered above reproach. Last week came another surprise. Two of the ten biggest banks in the U.S., Bank of America and First Chicago, said that federal regulators had forced them to shore up their financial structure. Comptroller of the Currency C. Todd Conover ordered both institutions to increase their level of capital, which is the pool of money that belongs to a bank itself and its shareholders.

The action is part of a campaign by regulators to bolster big U.S. banks. They intend to ward off any possibility of a near catastrophe like last July's $4.5 billion federal bailout of Continental Illinois.

The Comptroller, a banking regulator connected with the Treasury Department, has already stepped up bank inspections from one per year to two or three.

At San Francisco's Bank of America, profits have been depressed for three straight years, partly because of farm and real estate loans that turned sour. During the first nine months of the year, the bank suffered $628 million in loan losses, compared with $431 million in all of 1983. Federal regulators want the institution to increase its capital by about 20% in order to create a larger reserve against uncollectible loans. This can be done by limiting dividend payments to shareholders or issuing additional stock. After the disciplinary action, Bank of America Chairman Leland Prussia admitted, "I guess you could say it was our turn." But, he added, "we have a very stable, solid institution."

The measures forced on First Chicago were much stronger than those on Bank of America. The Comptroller imposed a detailed plan for tightening up almost every aspect of the way the bank handles problem loans of $10 million or more. In October the bank shocked the financial community by announcing a $72 million third-quarter loss that stemmed from a write-off of $278 million in bad loans. The new disclosure was an added loss of face for First Chicago's management. Said William Handel, director of financial-industry research at the consulting firm of Whittle & Hanks: "This is definitely going to hurt its reputation as Chicago's premier bank."

First Chicago admitted last week that the Securities and Exchange Commission is also investigating the bank's huge third-quarter loss. Among other things, the SEC is trying to determine whether the bank improperly put off declaring the bad loans in order to protect its profits.