Problem Bank Guaranty Financial Seen As Next Failed Bank – Maybe

FDIC Should Close Guaranty Financial But Will It?

There were numerous news reports today that Guaranty Financial (GFG) will be the next large bank to collapse into the arms of the FDIC.   Guaranty Financial’s management has admitted that they have run out of options and cannot comply with an April cease and desist order from the Office of Thrift Supervision (OTS) to raise additional capital.

Guaranty Financial had invested heavily in mortgage backed securities believing them to be safe investments when, in fact, they turned out to be toxic assets which necessitated major writedowns.  The writedowns caused Guaranty Financial’s capital ratios to fall below regulatory guidelines.

Due to Guaranty’s weak financial condition as well as uncertainty about future writedowns on its mortgaged backed security holdings and other assets, investors were unwilling to commit further capital to what appears to be a lost cause.  A Guaranty Financial spokesman noted that “Our primary stockholders have not affirmed their willingness to commit to a capital infusion…”.

Guaranty Financial joins the ranks of many other large banks that have openly admitted that they cannot raise capital and have dismal prospects for financial recovery – see Deathwatch At Corus Bankshares and Corus – The Failed Bank That Nobody Wants.

Why The FDIC May Not Close Guaranty Financial

The real question is why the regulators have allowed numerous banks that are obviously insolvent to remain open, a question which has been previously addressed on this site.  Slow regulatory response could be based on a reluctance to deplete the Deposit Insurance Fund (DIF) and the subsequent necessity of borrowing from the Treasury.  The FDIC has repeatedly emphasized that they wish to avoid public confusion and panic by depleting the DIF.

In the FDIC First Quarter Report for 2009, the DIF had declined by $4.3 billion to only a $13 billion balance and the DIF reserve ratio was at its lowest level since March 1993.   The 57 banking failures so far this year has cost the DIF fund $12.7 billion.   Guaranty Financial has approximately $16 billion in assets.  We can estimate the cost to the FDIC of closing Guaranty Financial at close to $5 billion, based on loss ratios for previous bank closings this year.  (FDIC losses have been running at approximately 30% of a failed bank’s assets).

Routine assessment fees replenish the DIF on a regular basis and the FDIC has recently levied a special assessment of 5 basis points on banks covered deposits.  Nonetheless, the FDIC Insurance Fund is running on empty – a fact that the FDIC does not want to publicize.  Guaranty Financial should be closed but it will be interesting to see if the regulators actually do what they should do.

Source: FDIC

Comments

  1. I have been looking up the very same reports about Guaranty Bank. It also appears that they will be getting the axe in the near future. One of the most comprehensive list I have found so far is:

    http://www.moneyeconomics.com/index.php?option=com_content&view=article&id=207:failed-bank-reports&catid=42:saving-rates&Itemid=106

    where they have Guaranty Bank as a highly at risk bank.

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