Enterprise Banking Co Failure Exposes Inequity of FDIC Deposit Insurance – Uninsured Depositors Out Of Luck

January 21, 2011 -Enterprise Banking Company, McDonough, GA was closed today by the Georgia Department of Banking and Finance which named the FDIC as receiver.  The FDIC was unable to find a buyer for Enterprise Banking.  To protect insured depositors, the FDIC created the Deposit Insurance National Bank of McDonough (DINB) to take over the operations of Enterprise Banking.

When a bank fails and the FDIC is unable to find a buyer to assume all deposits of the failed bank, the transaction is classified as a “payoff”.   Depositors covered by FDIC insurance are promptly paid off by the FDIC.   Depositors with balances above the FDIC insurance limit are potentially subject to a full loss of all uninsured deposits.

The failure of Enterprise Banking Co is yet another example of the importance of ascertaining the financial health of your bank to avoid potential losses of savings.   It is also an example of the “lottery aspect” of deposit insurance.  Large depositors in a failed bank that cannot be sold by the FDIC are out of luck and subject to full loss on uninsured deposits.

The odds of losing money in a failed bank may be higher than most people realize.  During 2010, there were 8 payoffs by the FDIC for failed banks that the FDIC could not sell.  The 8 payoffs represented over 5% of all bank failures during 2010.   During 2009, ten banks failed that could not be sold by the FDIC.

Depositors subject to loss on the failure of Enterprise Banking Company are certain to be further aggravated by the inequitable treatment of depositors.  According to the FDIC, “noninterest-bearing accounts are fully insured regardless of amount”.   Unlimited insurance coverage on noninterest bearing accounts is effective through December 31, 2012 under section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Consumers may be justified in wondering exactly who is being “protected” by the Dodd-Frank Act.  One way to view this is that a depositor allowing a bank to use his deposits with a zero interest rate return is protected from loss, but a depositor being paid a ridiculously low interest rate on a certificate of deposit would not be protected.  A great deal for the banks – not so great for depositors.

Depositors losing money on the Enterprise Banking Company failure may also properly wonder if a depositor has the obligation to become a forensic accountant in order to avoid losses on a bank failure – the short answer in this case is yes.

The FDIC advises depositors with uninsured funds to call the FDIC Call Center at 1-800-405-8251 to determine insurance coverage.  If it turns out that deposits are uninsured, the FDIC will mail the depositor a Receiver Certificate.  Eventually, this certificate will allow depositors to share proportionately if any funds are recovered when the assets of Enterprise Banking Company are disposed of.  According to the FDIC “you may eventually recover some of your uninsured funds”.  My advice to uninsured depositors – don’t hold your breath.

Enterprise Banking was in deplorable financial condition and should have been closed by regulators far sooner than it was.  One indication of Enterprise Banking’s devastated balance sheet (besides the fact that the FDIC could not sell the bank) is the size of the “estimated loss” being taken by the FDIC on the closing.  The FDIC estimated loss of $39.6 million to close Enterprise represents a gigantic 40% of the bank’s assets, leaving very little for creditors and uninsured depositors.

There are steps that can be taken to protect deposits in excess of the FDIC insurance limits and hopefully all subscribers to Problem Bank List are in no danger of losing their savings.  See:

Insured depositors of failed Enterprise Bank also face major inconveniences including having to move all accounts to another institution by January 28th and the loss of any high rate CDs that were taken out when banks actually paid depositors interest on their money.  (For CDs automatically closed early, the FDIC will not impose an early withdrawal penalty.)  In addition, deposits will be frozen for any depositors with delinquent loans.

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