Lending Losses Doom Guaranty Financial
Although not formally announced by the banking regulators, it looks virtually certain that Guaranty Financial will be closed on Friday. Numerous reports indicate that Guaranty Financial will be taken over by Banco Bilbao Vizcaya Argentaria SA of Spain in an FDIC assisted transaction. As was the case with the closing last week of Colonial Bank, regulators held off on closing the bank until a bidder for the failed banks deposits and assets could be selected.
There had been intense speculation that Guaranty Financial would be close in late July – see Guaranty Financial Seen As Next Failed Bank – Maybe.
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.
Will The FDIC Need To Borrow From The Treasury As Banking Losses Mount?
Guaranty Financial would be the second largest banking failure of the year. Based on the average losses of previous banking failures, the closure of Guaranty Financial is sure to result in another large loss for the FDIC Deposit Insurance Fund (DIF). With average losses at failed banks running at approximately 30% of assets, the FDIC could be looking at potential losses of $4 billion based on the $13.5 billion in assets held by Guaranty Financial.
The large number of banking failures this year has virtually depleted the DIF fund. The FDIC has taken steps to raise additional DIF reserves by increasing insurance assessments on FDIC insured banks. In addition, the FDIC’s credit line with the Treasury was increased this year so that funds would be available to protect depositors of failed banks should the DIF fund be insufficient. With many more banking failures expected this year, it would not be surprising to see the FDIC use its line of credit with the Treasury to protect depositors of failed banks – see DIF Running On Empty.