Regulators closed two small banks in Nevada and Illinois bringing the total number of banking failures for 2011 to 28.
During 2010, there were a total of 157 banking failures, the most since 1992 when 181 banks failed. A total of 140 banking failures occurred during 2009 and 25 in 2008.
Although the pace of banking failures this year has slowed from 2010, the number of banks on the FDIC Problem Bank List increased to 884 at December 31, 2010, up from 860 in the previous quarter. Total assets of problem banks amount to $390 billion and almost 12% of all FDIC insured institutions are on the Problem Bank List.
The large number of banking failures since 2009 has cost the FDIC almost $60 billion and despite increased deposit insurance assessments on the banking industry, the Deposit Insurance Fund has a negative balance of $7.4 billion.
The financial system is no longer directly threatened by the collapse of “too big to fail banks” and, accordingly, the FDIC seems to have adopted a very leisurely pace on closing insolvent banks. Real estate values continue to deteriorate which only puts additional stress on bank balance sheets. If the economy does not recovery strongly and real estate prices continue to drop, many of the problem banks may be unable to recover and face closure by regulators.
The two failed banks this week had total assets of $331.7 million and the loss to the FDIC Deposit Insurance Fund was $62.9 million. Total losses on banking failures this year now total almost $2 billion. For further details on each banking failure, please click on the links below.
Bank Failure # 27 – Western Springs National Bank & Trust, West Springs, IL
Bank Failure #28 – Nevada Commerce Bank, Las Vegas, NV
If you think the FDIC has adopted a leisurly pace to bank failures you are mistaken. Believe me, any bank that is approaching “significantly undercapitalized” per FDICIA regulations is receiving rigorous review from both field examiners and regional office staff as well as state regulators. Any bank approaching “critical undercapitalization” has FDIC staff downloading all important information necessary for potential investors for the problem bank’s resolution.
It isn’t that the FDIC pace is more leisurly, it is that the pace of problem banks with terminal capital levels has slowed.
See Closing of Bartow County Bank – regulators closed this bank while allowing First Choice Community Bank to remain open despite being “critically undercapitalized”. Regulators may have a reason for this but have been inconsistent in deciding which banks to close. By allowing insolvent banks to remain open, the pace of bank closings by regulators, can charitable be described as “leisurely”.
There are a number of reasons a bank may not be closed immediately when it becomes undercapitalized, which by the way is a 2% Tier I capital to Assets ratio, not insolvency. There may be a potential investor working with the bank and the regulators, there may be an appeal by the bank of examination findings that the closing will be based upon, and there may be other potential recapitalization opportunities (such as recoveries associated with lawsuits or asset sales).
I have personally seen all of these scenarios unfold and in a past life have slowed the closure process for those very reasons. The thing to remember is that there are myriad confidentiality laws associated with bank examinations and regulations. They don’t allow for regulators or banks to discuss what is happening behind the scenes. What you interpret as leisurely is simply “due process” that is due to all Americans, individuals and corporations.
If you consider that closure of a bank without due process would in effect be a “taking” by government because 2% capital still represents positive equity, the deliberate pace of closures should be considered a good thing, not bad.
For example, consider if you were a shareholder of a bank with a 2.5% Tier I capital ratio and a private placement recapitalization approved except for technical SEC requirements, wouldn’t you be happy that the regulators were deliberate and allowed for the recapitalization and salvaging your investment?