EAST PROVIDENCE, R.I. (9/24/08)--The problems facing today's financial market are different from those that caused a number of banks and credit unions in Rhode Island to collapse in 1991, said state regulators and industry experts. There are two key differences, regulators told The Providence Journal
* The current crisis on Wall Street relates mainly to investment banks, which do not take deposits--not regular banks that accept deposits and make loans, said Allan W. Graham, professor of accounting at the University of Rhode Island's College of Business Administration. * The deposits of the collapsed institutions in 1991 were insured by a private firm, the Rhode Island Share and Deposit Indemnity Corp. (RISDIC), which failed, said A. Michael Marques, director of the Rhode Island Department of Business Regulation. Today all depository institutions in the state carry federal deposit insurance.
The current financial market crisis stems from subprime loans, or mortgage loans made to risky borrowers, Graham told the newspaper. The loans were assembled by the investment banks into packages and sold to investors as "high quality corporate debt." When homeowners defaulted, the investment packages dropped in value, crippling investment banks and hurting investors who bought the packages, Graham said. Big, national banks that expanded into investment banking are affected. But smaller local banks and credit unions don't have the exposure to those risky assets that were the problem for the big failures, said Graham. Credit unions and smaller banks are more conservative and the state's banks and credit unions are safe, he said. Marques says institutions aren't totally immune from today's economy. They may see an uptick in delinquencies but that is what institutions expect when they lend, he said, noting that "it's manageable." He told the paper that overall, banks and credit unions in Rhode Island are safe and sound. The article reported that independent research and rating firm Veribanc analyzed 40 banks, credit unions and thrifts based in the state and ranked 26 of them with the highest safety rating. None received its lowest possible rating. Credit unions and banks in the state today have federal insurance that would kick in if an institution failed, the newspaper said. While depositors recovered their funds from the RISDIC crisis via a state-backed bailout, federal insurance would provide full coverage to today's depositors up to $100,000 per depositor, per account category, per institution, the article said.