The Rhode Island banking crisis took place in the early 1990s, when approximately a third of the U.S. state of Rhode Island's population lost access to funds in their bank accounts. The events were triggered by the failure of a Providence bank, Heritage Loan & Investment, due to long-term embezzlement by its president. News of its problems led to a bank run in which customers tried to withdraw money from the bank which did not have enough money available. In normal circumstances, depositors would be protected by the bank's insurance, but the state's private insurer had a long history of problems and was unable to fulfill its commitments. When the insurer collapsed, Governor Bruce Sundlun announced the closure of 45 credit unions and banks just hours after his inauguration.
In the first banking emergency in the state since the Great Depression, 300,000 depositors lost access to their money. Though some of the institutions reopened relatively quickly after obtaining federal insurance, many did not qualify and remained closed for an extended period of time. The state government set up an agency to manage the crisis, selling $697 million in bonds to repay people while filing about 300 lawsuits against the closed institutions and other companies that played a role in the crisis.
The shutdown sparked demonstrations and protests. Corruption hearings added to public frustration, when several executives and public officials were called to testify about their last minute withdrawals from banks just before their closure. The manhunt for Joseph Mollicone Jr, the Heritage Loan & Investment president who had fled to Utah, took nearly 18 months before he turned himself in. He was convicted, and given what at that time was the state's most severe sentence for a "white collar" offense.
Though all depositors were eventually repaid, most had to wait months or years for compensation. Most of the big banks remained closed for more than a year, and several never reopened.
Heritage Loan & Investment failure
Heritage Loan & Investment was a bank in the Federal Hill neighborhood of Providence, Rhode Island. In 1990, examiners with the state's Department of Business Regulation (DBR) discovered $13 million of fraudulent loans in the bank's records that had purportedly been made to 128 people and businesses that never asked for or received a loan. The loans had been fabricated by bank president, Joseph Mollicone Jr., who began taking money from the bank in 1986 and had set up more than 90 businesses to funnel the money through. The Providence Journal reported that "he became legendary for dodging questions about missing bank records, once suggesting to a bank examiner: 'Let's have a muffin'."
In October 1990, the bank's insurer, the Rhode Island Share and Deposit Indemnity Corporation (RISDIC), took control of the bank following an examination that revealed its poor state. When Mollicone learned authorities had caught on to his illicit activities, he fled the state, disappearing on November 8, 1990, after boarding a plane at Logan International Airport in Boston. A grand jury investigation opened a few days later, on November 13. As Heritage customers learned what was happening, there was a bank run in which they withdrew $13 million of the bank's $22 million in total deposits. On November 18, Governor Edward D. DiPrete closed the bank on what was supposed to be a temporary basis, while officials tried to determine what was going on and control the damage.
On November 26, Mollicone was charged with embezzlement and considered a fugitive. By the time he left, Mollicone had taken more than 80% of the money people deposited at the bank, according to prosecutor Kevin Bristow. The state attorney general's office estimated that he stole $15.2 million overall. The bank opened again on December 4 to allow depositors to withdraw the rest of their funds, before closing again.
Rhode Island Share and Deposit Indemnity Corporation Background The Heritage Loan & Investment bank was insured by the Rhode Island Share and Deposit Indemnity Corporation (RISDIC), a state-chartered nominally private enterprise which backed 45 of the state's credit unions and banks. It started operating in 1971 and was intended to insure only small institutions, with $134 million insured in 1972. It expanded quickly, though, increasing to $761 million insured in 1980. It continued to grow through the 1980s, enabled by loosened state and federal laws.
Between the mid-1970s and early-1990s, several state-chartered, privately operated insurance entities failed, beginning with Mississippi in 1976, then Nebraska and California in 1983. The 1980s saw a trend of banks and credit unions, often at the urging of state-level insurers, shifting to federal insurers, the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). The trend became particularly pronounced after Ohio and Maryland, the largest state-chartered funds, collapsed in 1985, causing bank crises in those states. RISDIC, however, did not learn from the mistakes of other states. To the contrary, it even increased the maximum deposit it would insure. When it was founded, the per-account maximum to be insured was $40,000, but that number increased to $500,000 in late 1985, with no limit on some accounts. When RISDIC lost some of its most stable banks, it began insuring more weak institutions. By the late 1980s, RISDIC was riddled with problems. It insured primarily those institutions that were unable to secure federal insurance, guaranteeing large sums of money at weak banks.
Concerns had been raised about RISDIC for years before its collapse. Federal regulators, the Federal Reserve Bank of Boston, and others issued warnings as early as 1985. The state attorney general, Arlene Violet, made several attempts to draw attention to RISDIC's vulnerability without success. When Violet entered office, she began attending bank board of incorporation meetings and was struck by the way the group charged with overseeing the state's banking system seemed to allow favors to politically connected people. After seeing problems with the insurer's financial reports, she tasked members of her white collar crime unit with producing a report about the company. The finished report, completed in December 1985, highlighted financial risks as well as various conflicts of interest involved in its management and regulation. It led to the proposed bill in 1986 that would require RISDIC-insured institutions to obtain federal insurance, effectively closing the insurer. It was supported by the DiPrete administration but failed in the state General Assembly. The report was not made public, but in the days after the bank closure, it was leaked to the Providence Journal, which printed it in its entirety.
A significant problem was lack of oversight. Members of RISDIC's board of trustees were primarily managers of the institutions it insured. There were no formal rules requiring any outside board members, resulting in only three members appointed to represent the public and fifteen with conflicts of interest, representing insured banks. In the late 1980s, government budget cuts moved the responsibility for conducting examinations of the insurer from the Department of Business Regulation (DBR) to RISDIC itself, further reducing outside and independent oversight. In addition to being poorly regulated, it failed to abide by standard industry practices and although it formally adopted the standards of the National Association of Share Insurance Corporation, it did not actually implement them effectively. The board failed to review reports by examiners and outside auditors.
According to Pulkkinen and Rosengren, "That RISDIC did not fail earlier was attributable to its political clout and its ability to mask severe financial difficulties within its underlying membership." She said the only reason the legislation to end RISDIC failed was because of problematic relationships between legislators and the banks.
Failure The Heritage Loan and Investment collapse came months after Jefferson Loan and Investment Company, another RISDIC-insured bank, folded because of fraudulent leases. Jefferson used up a great deal of RISDIC's resources, leaving them in particularly bad shape when the even more costly Heritage collapse came about in November 1990. The $13-million bank run in November, after customers learned the condition of Heritage, used up a large part of RISDIC's $25-million reserve. At the same time, concerned depositors at other RISDIC-insured institutions began withdrawing their own funds at an increased rate. As a result of the draining of its assets, RISDIC was left insolvent, unable to meet deposit insurance claims.
Several RISDIC-insured institutions began working to obtain federal insurance amid these events. Some were delayed, while many others reconsidered, opting to explore other options upon realizing the stricter controls federal insurance would place on the institutions. The outgoing DiPrete administration prepared a plan to switch RISDIC-insured institutions to federal insurance, but did not act on it because, according to the Providence Journal, "it would be presumptuous for him to do so in the waning days of his term." The incoming administration of Bruce Sundlun planned to act on it in the days or weeks following his inauguration, but action hastened after a letter was delivered from the RISDIC board of directors. On December 31, 1990, the day before Sundlun's inauguration, the RISDIC board voted unanimously to request conservatorship due to "extraordinary liquidity demands ... in recent days."
A retrospective analysis by Walker F. Todd in Economic Commentary found similarities in the failures of the Ohio, Maryland, and Rhode Island systems. Among them were the insurers' influence in state legislatures, failure to act when notified of problems, political authorities downplaying the seriousness of the funds' insolvencies, and, most importantly, "their incapacity to exercise sufficient supervisory authority to limit risks or to impose effective risk-based deposit insurance premiums to make unwise risk-taking more costly for the insured institutions creating the largest risks." Effectively, without enough funds and with too much risk, any single major loss would erode confidence and lead to disaster. On the other hand, whereas weaknesses in the insured institutions themselves were a factor in all three states' funds, Ohio and Maryland institutions were weakened primarily by fraud while Rhode Island was more affected by losses in real estate loans and investments, which occurred across New England between 1989 and 1992.
Bank closures and aftermath By state law, banks and credit unions cannot legally operate without insurance. Hours after his January 1, 1991, inauguration, Sundlun held a press conference. Due to a "banking emergency," he ordered the indefinite closure of the 45 RISDIC-insured financial institutions, about three-quarters of which were credit unions. Police were posted at all closed banks "to maintain public order," according to officials cited in the Providence Journal. RISDIC-insured institutions were ordered not to accept deposits, grant withdrawals, pay dividends, pay creditors, renew loans, liquidate assets, or incur new debts. They were, however, to pay their own employees as applicable, and to submit plans for continued operation to Maurice C. Paradis, the new business regulation director in the Sundlun administration. Bank customers were, however, expected to repay loans.