Monday, August 17, 2009

Failed Banks Weigh on FDIC Insurance Fund

So the count of failed banking institutions hit 77 on Friday, with the FDIC seizing its biggest fish to date: Colonial. Fortunately, the FDIC found a buyer for the bank with $22 billion in assets, but not without providing the purchaser, BB&T, with one of its famed loss-sharing agreements. You know, the kind of deal you'd like to get on your trading account? I'll take 100% of the upside, and let the government eat the losses on my crappier trades. The loss-sharing agreements with the FDIC lessen the ultimate cost to the insurance fund, which is rapidly shriveling, and probably shivers with fright every Friday afternoon awaiting the news of the latest subtraction from what remains of its meager pool.

As I've noted several times before in my posts about bank failures, it is surprising how costly the recent bank failures have been as a percentage of assets. Lo and behold, the WSJ reports today that the recent period of bank failures are even more costly when measured as a percentage of assets than those during the S & L Crisis. The largest hit so far is coming from Community Bank of Nevada where the cost to the FDIC's insurance fund is estimated to be roughly 51.4% of the bank's $1.52 billion in assets. For the 102 banks that have collapsed in the past two years, the FDIC's estimated cost averaged 25% of assets. This is up from the 19% rate between 1989 and 1995 when 747 financial institutions were closed by regulators. What accounts for the increase in cost? First of all, many regional banks that were shut out of the mortgage boom chose to delve into risky construction lending that is now coming back to bite them. Is it any wonder that the most expensive bank failure to date as a percentage of assets is based in Nevada where the construction boom was particularly pronounced? Also, clearly regulators did a horrible job of supervising these banks, allowing them to grow at unsustainable rates through high-risk lending. For example, Integrity Bank of Alpharetta, Ga was permitted to continue accepting deposits while promising unusually high interest rates for more than two years after examiners noted deficiencies in its loan underwriting. The funny thing about lax regulatory supervision is that we wind up paying for it twice. First we pay the salaries for a bunch of bank examiners to sit around and do nothing while the largest real estate bubble we've ever witnessed percolates around them. Then we pay to clean up the mess when all of the institutions fail. Sure the FDIC's deposit fund is financed by premiums collected from banks. But the fund is down to $13 billion and there are 300 banks on the problem bank list. Does anyone really think the FDIC isn't going to have to draw down on that $100 billion line of credit with the Treasury?

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