By Donella Meadows

–March 12, 1987–

About half the people I met in Oklahoma had personally experienced a bank failure over the past year or so. On Thursday, January 8, of the week I was there another bank went under, Security National Bank of Norman, Oklahoma.

Friday morning Security National reopened under new management. The TV news showed its customers calmly doing their business.

Not a big deal, or so it appeared. Bank failures are so routine in Oklahoma’s depressed oil- and farm-based economy that everyone knows how to behave. But as I checked around and asked questions, I learned that bank failures are not always smooth, and that they have serious ramifications for the community in which they occur and for the entire nation.

Security National was the third Norman bank to go. When the first one failed last year, a radio station broadcast some rumors, and there was a run. FDIC (Federal Deposit Insurance Corporation) officials had to stand at the doors and write checks by the thousands as frightened people closed out accounts.

No one panicked when Security National failed, but everyone felt the blow. The bank was the bedrock of Norman, owned by a prominent local family. Everyone thought other banks might go under, but not Security National.

But many of Security National’s reasonable-looking loans had gone bad. Farms had been folding and so had some of the businesses that served them. Real estate values were dropping faster than mortgages were being paid. Norman is the home of the University of Oklahoma and of many state institutions, whose budgets had been cut with the downturn in the state economy.

Security National’s owners and the FDIC had been preparing for the failure. The new buyer was ready to step in. It was a consortium of investors from Arkansas — the Oklahoma legislature had just permitted interstate banking one month before. The time between the Thursday night closing and the Friday morning opening must have been frantic, as an FDIC team swept in, sealed the books, decided which loans were viable, who owned what, which obligations the FDIC would assume.

Apparently one night was not enough to accomplish the changeover. There were many foul-ups in the following weeks. Checks bounced that shouldn’t have. Deposits appeared in the wrong accounts. Local merchants had to track down late payments. Confusion spread through the economy of Norman. “We were used to great customer service in that bank, but it went right out the window,” a depositor told me. “You go in to straighten out one of these messes and you’re met by a steely-eyed stranger who doesn’t seem to care at all. It would be more satisfying to talk to the computer. And the policy now is No Mercy.”

Automatic coverage of overdrafts was cancelled without notice. People who had missed a mortgage payment, and businesses that had fallen back to paying just the interest and not the principal on loans, were given 5 days to catch up. Many couldn’t react that fast, and a chain of foreclosures followed.

The town feels strangely adrift, its old certainties swept away. “The new owners just don’t care about the welfare of the community. I used to think of that bank as an anchor that would support me if I got into trouble. Now the whole economic structure seems fragile to me. My financial decisions are different, much more conservative, because they’re no longer based on trust.”

A single bank failure, even when the deposits are insured and everyone stays calm, means a loss of equity for the owners, a loss of jobs for the management, a loss of credit lines for business, and a loss of confidence in the community. A series of bank failures (in 1986 there were 135 in the United States, the highest number since the depression), means a problem for the nation.

FDIC and its sister organization FSLIC (Federal Savings & Loan Insurance Corporation, pronounced “fizzlick”) are federally-operated insurance companies for banks. They receive premium payments from participating banks, which are invested against possible future trouble. Drains on FDIC and FSLIC are now greater than payments. FDIC anticipates a $4 billion deficit this year against assets of $18 billion. FSLIC ran a $4 billion deficit last year and has only $1.9 billion remaining to insure $800 billion in deposits.

Congress has resolved that “the full faith and credit of the U.S. Treasury” stands behind FSLIC and FDIC. We are about to find out what that means, since FSLIC will be bankrupt this year and FDIC within a few years at the rate things are going. An estimated $15-$25 billion is needed immediately to restore FSLIC.

But the Treasury is already using its “full faith and credit” to finance the government’s $200 billion deficit. Congress, caught in its self-imposed trap of Gramm-Rudman, high military budget, and refusal to raise taxes, doesn’t see where to get $15-$25 billion. It is considering floating “FSLIC recapitalization bonds”, high-interest junk bonds with no real assets behind them.

In other words, Congress is willing to stand behind the bank deposits of the citizens of the United States with further government debt. Another story will be added to the teetering Tinkertoy tower of national fiscal irresponsibility. If that happens, it won’t take much of a tremor to spread to the whole nation the vulnerability felt now by the citizens of Norman, the feeling that one’s economic foundations have disappeared.

Copyright Sustainability Institute 1987