‘December Surprise’ a Dud : Banking: A rash of failures was feared under tough new rules. But record industry profits help make it a ‘non-event.’

The much-ballyhooed “December surprise� in banking is at hand--but it’s not the surprise that was predicted.

On Saturday, the most Draconian banking rules ever go into effect, requiring federal regulators to start closing banks and thrifts whenever their capital--an institution’s final cushion against losses--falls below 2% of their assets.

Yet despite warnings from presidential candidate Ross Perot and other naysayers that 100 banks would be shuttered this month, nothing much is going to happen.

“It’s the December dud,� said Bert Ely, an Alexandria, Va., industry analyst.

Regulators doubt that any more banks or thrifts will be closed the rest of this year. And next year’s failures, they say, generally will be limited to small- and medium-size institutions.

A number of factors--including stronger than expected earnings and a hoarding of cash by financial institutions--caused the surprise to fizzle.

Critics say the record profits of both banks and thrifts are the consequence of high loan interest rates, tight credit policies and low payments to depositors. Yet the bottom line leaves regulators and many industry leaders sporting a feel-good attitude after years of gloom.

Banks and S&Ls; are not out of the woods yet, however--especially in recession-riddled Southern California.

Here, worries abound that plunging real estate values may fall a little more, holding back any economic recovery for another year. More than half the loans at small banks in the Southland, for instance, are backed by real estate, according to a Federal Reserve Bank of San Francisco study.

The provisions that take effect Saturday will arm banking regulators with some of the powers held by the thrift industry’s supervisors since 1989. The rules require regulators to take “prompt corrective action� against banks and thrifts that, for whatever reason, fall on hard times.

The idea behind the Federal Deposit Insurance Corp. Improvement Act of 1991 is this: If regulators are required to seize critically capital-short institutions within 90 days, the failed banks and S&Ls; will have more value to potential buyers than if they are allowed to drift into insolvency.

Faster action would also reduce the losses to the Federal Deposit Insurance Fund.

The trigger for prompt action is when a bank’s capital falls below 2% of its assets.

Regulators, however, do have a bit of discretion left. If failing institutions can show that they have a good chance of improving their financial condition, regulators can give them up to three 90-day extensions.

“After Dec. 19, I don’t expect regulators to be doing a lot of things except calling banks with less than 2% capital and asking them to submit their plans for raising more money,� said Michael Conover, an analyst with Secura Group, a consulting firm in Pasadena.

In fact, federal takeovers in the last five months have reduced the number of banks that were critically capital-short--the lowest of five categories of capital--from 60 banks with $25.3 billion in assets to 24 banks with $2.5 billion in assets, according to Andrew C. Hove Jr., acting FDIC chairman.

While thrifts have been under pressure for the last three years to bolster their financial condition, banks have had even longer to stash away cash. In 1988, the Federal Reserve Board met in Basel, Switzerland, with the central banks of 10 other nations to set minimum capital standards for banks worldwide. Last year’s federal law simply adopted those standards, said Rod Jacobs, vice chairman of Wells Fargo Corp.

“That’s why Dec. 19 is such a non-event for most of us,� he said.

Indeed, banks have been busy hoarding cash.

In the year ended June 30, total shareholder equity in the nation’s banks--the amount that owners put into the institutions along with the profits retained by the banks--grew 9.6% to $248.5 billion. In just the first six months of this year, California banks boosted shareholder equity 7.2% to $23.5 billion.

“Given the general economic environment, especially in California, it’s prudent to increase your economic cushion,� Jacobs explained.

Still, some banking and thrift experts are more pessimistic, and they point to several nagging concerns:

* The FDIC has projected that 100 to 125 banks with an estimated $76 billion in assets will fail next year--though the figures will be reviewed next month and may be revised downward.

* The FDIC has 975 banks, including about 50 in California, on its confidential “troubled bank� list. Perhaps 20% of those institutions eventually will fail, the agency says.

* Thrift regulators, out of money to close S&Ls; since April, may start seizing numerous thrifts, kicking out management and operating the institutions themselves, although the Office of Thrift Supervision won’t estimate how many it might take over next year. Such takeovers so far have doubled the cost of cleaning up the industry.

* The OTS has 19 thrifts with $27 billion in assets on its endangered institutions list.

Furthermore, the key to the financial resuscitation of banks and thrifts--low interest rates that produce high profit margins--could well prove their undoing, according to Roger J. Vaughan and Edward W. Hill, co-authors of “Banking on the Brink.�

Their highly pessimistic views on the state of the banking industry fueled Perot’s bank failure predictions during the presidential debates.

Vaughan and Hill argue that--mainly for competitive reasons--banks will be forced to increase the interest rates they pay for deposits. That cost will overtake the income they’re getting from their huge investments in low-paying but nearly risk-free government securities.

Substitute home loans for securities, they point out, and that’s essentially the scenario that ignited the debacle in the thrift industry 12 years ago.