FDIC ready to act on Puerto Rico banks if needed -letter

NEW YORK (Reuters) - Puerto Rico’s FDIC-insured banks are well capitalized but the Federal Deposit Insurance Corp stands ready to act if one should become insolvent, according to a letter sent to Congressman Sean Duffy, chairman of a Financial Services subcommittee who had inquired about their health.

Puerto Rico’s Governor Alejandro Garcia Padilla shocked investors in June when he said the island’s debt, totaling $72 billion, was unpayable and required restructuring. The island has been in recession for nearly a decade.

“Our committee has jurisdiction over banks ... and we have been working on the safety and soundness concerns of Puerto Rico banks,” said Duffy, who is separately working on a proposal to look for solutions to Puerto Rico’s problems with possible ideas including using a financial control board.

Duffy requested in an Aug. 4 letter that the U.S. regulator detail how it was addressing potential issues among the island’s banks.

The FDIC is “closely monitoring the fiscal and economic situation in Puerto Rico and assessing the potential impact on individual institutions,” said an Aug. 18 letter from FDIC chairman Martin Gruenberg, provided by Duffy’s office. The FDIC confirmed its authenticity.

Beginning in September 2013, the FDIC held regular discussions with the banks it supervises about their holdings of Puerto Rico debt and “observed a decline in the exposure over time.”

The five FDIC-insured Puerto Rico banks - Banco Popular de Puerto Rico, Banco Santander Puerto Rico, FirstBank Puerto Rico, Oriental Bank and Scotiabank de Puerto Rico - had $442 million exposure to Puerto Rico government securities in September 2013. That fell to $240 million as of June 30.

The banks are well capitalized, the letter said, and the FDIC stands ready to “ensure the orderly, least costly resolution of failed insured depository institutions should one of them become insolvent.”

Duffy, a Republican from Wisconsin, also said he is working on broader ideas for a draft proposal to address solutions for Puerto Rico.

Ideas could include a financial control board, an idea proposed in June by Republican Congressman Jeffrey Duncan, and Duffy is examining the possible impact of lifting the Jones shipping Act.

The Jones Act requires ships carrying goods from one U.S. port to another to be built in the United States.

He did not rule out supporting extending Chapter 9 bankruptcy protection for Puerto Rico entities, currently a Democrat-supported proposal, but would like to see it part of wider reforms.

“We have to come up with solutions that help the Puerto Rico people,” said Duffy. “It’s incumbent upon Republicans to engage on this issue.”