Friday Night Bank Seizures
Despite some decent profit reportings for the first quarter for some larger financial institutions, there are still a lot of small banks that are facing hardships and are being seized, sometimes in the middle of the night, by the FDIC. Below are just two of the latest:
Bank regulators closed American Sterling Bank bank on Friday, the 24th U.S. bank to fail this year as the struggling economy and falling home prices take their toll on financial institutions.
The Federal Deposit Insurance Corp said Missouri-based American Sterling had $181 million in assets and $171.9 million in deposits. The failure is expected to cost the FDIC deposit insurance fund an estimated $42 million.
The Missouri offices of American Sterling will reopen on Saturday, and the offices in California and Arizona will reopen on Monday as branches of Metcalf Bank, which is assuming all the deposits of American Sterling.
Customers can access their money over the weekend by check, teller machine or debit card, the FDIC said.
Bank regulators closed Great Basin Bank of Nevada on Friday, the 25th U.S. bank to fail this year as the struggling economy and falling home prices take their toll on financial institutions.
The Federal Deposit Insurance Corp said Great Basin had assets of $270.9 million and $221.4 million in deposits. The failure is expected to cost the FDIC deposit insurance fund an estimated $42 million.
Nevada State Bank agreed to assume the insured deposits of Great Basin, whose five branches will reopen on Monday as branches of Nevada State Bank.
For a more in depth look at aspects of the FDIC see Biggest Bank Failure of 2009.
Biggest Bank Failure of 2009 [Cost of $670 Million - FDIC]
New Frontier Bank, one of Colorado state’s biggest banks, was closed down by state regulators, the Federal Deposit Insurance Corporation said in a statement.
Based in Greeley, Colorado, New Frontier had, as of March 24, total assets of two billion dollars and and total deposits of about 1.5 billion, the FDIC said.
It was the 23rd bank closed to business since January. Until New Frontier, the biggest bank failure this year had been California’s Merced Bank, with 1.7 billion in assets.
Unable to have a rival bank take charge of New Frontier’s credits and deposits, the FDIC said it “created the Deposit Insurance National Bank of Greeley (DINB), which will remain open for approximately 30 days to allow depositors time to open accounts at other insured institutions.”
New Frontier’s failure will cost the FDIC around 670 million dollars.
After suffering no bank failures at all in 2005 and 2006, the US banking system saw three banks going under in 2007, followed by 25 in 2008 and 23 so far this year.
Now the question is – what will this news do to the markets on Monday and what does the cash on hand at the FDIC look like these days?
In February, 2006, George w. Bush signed into law the FDIRA, the Federal Deposit Insurance Reform Act which merged the old Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) together under one fund called the Deposit Insurance Fund (DIF). Having the funds separate created much of the turmoil in the 80′s with the savings and Loan (S&L) crisis.
A March 2008 memorandum to the FDIC Board of Directors shows a 2007 year-end Deposit Insurance Fund balance of about $52.4 billion, which represented a reserve ratio of 1.22% of its exposure to insured deposits totaling about $4.29 trillion. The 2008 year-end insured deposits were projected to reach about $4.42 trillion with the reserve growing to $55.2 billion, a ratio of 1.25%.
As of June 2008, the DIF had a balance of $45.2 billion. Bank failures typically represent a cost to the DIF because FDIC, as receiver of the failed institution, must liquidate assets that have declined substantially in value while at the same time making good on the institution’s deposit obligations. In July 2008, IndyMac Bank failed and was placed into receivership. The failure was initially projected by the FDIC to cost the DIF between $4 billion and $8 billion, but shortly thereafter the FDIC revised its estimate upward to $8.9 billion. Due to the failures of IndyMac and other banks, the DIF fell in the second quarter of 2008 to $45.2 billion. The decline in the insurance fund’s balance caused the reserve ratio (fund’s balance divided by the insured deposits) to fall to 1.01 percent as at 30 June 2008, down from 1.19 percent in the prior quarter. Once the ratio falls below below 1.15 percent, FDIC is required to develop a restoration plan to replenish the fund, which is expected to involve requiring higher contributions from banks which deal in riskier activities.
In light of apparent systemic risks facing the banking system, the adequacy of FDIC’s financial backing has come into question. Beyond the funds in the Deposit Insurance Fund above and the FDIC’s power to charge insurance premia, FDIC insurance is additionally assured by the Federal government. According to the FDIC.gov website (as of January 2009), “FDIC deposit insurance is backed by the full faith and credit of the United States government”. This means that the resources of the United States government stand behind FDIC-insured depositors.” The statutory basis for this claim is less than clear. Congress, in 1987, passed a non-binding resolution to this effect, but there appear to be no laws strictly binding the government to make good on any insurance liabilities unmet by the FDIC.
Insurance Qualifications
To receive this benefit, member banks must follow certain liquidity and reserve requirements. Banks are classified in five groups according to their risk-based capital ratio:
-Well capitalized: 10% or higher
-Adequately capitalized: 8% or higher
-Undercapitalized: less than 8%
-Significantly undercapitalized: less than 6%
-Critically undercapitalized: less than 2%
When a bank becomes undercapitalized the FDIC issues a warning to the bank. When the number drops below 6% the FDIC can change management and force the bank to take other corrective action. When the bank becomes critically undercapitalized the FDIC declares the bank insolvent and can take over management of the bank.
As the balance of the FDIC gets depleted the “backing from the government” means that the taxpayers will be held accountable.
What is the Treasury Doing?
The massive programs designed to rescue the nation’s financial sector are operating without adequate oversight, with vague goals and limited disclosure of their details to the taxpayers who are paying for them, government watchdogs told a Senate panel Tuesday.
The Troubled Asset Relief Program, or TARP, was launched in the midst of last fall’s collapse of the nation’s banking system and is designed to get loans flowing to businesses and individuals.
But “without a clearer explanation” about parts of the program, “it is not possible to exercise meaningful oversight over Treasury’s actions,” said Elizabeth Warren, a Harvard Law School professor who leads a special congressional oversight panel monitoring the TARP program. Her comments came in a Senate Finance Committee hearing on the bailout program.
Noting that TARP passed Congress six months ago, Warren said that her group has repeatedly called on the Treasury Department to provide a clear strategy for the program — and that “the absence of such a vision hampers effective oversight.”
Although she has asked Treasury to explain its strategy, “Congress and the American public have no clear answer to that question.”
I have been harping on this for a long time now, and even my friends and family thought I was nuts… However, as I suspected and figured would happen upon the election of Barack Obama, we are now creeping closer and closer to having a Debt to Equity Ratio of 1 meaning that our Debt is almost equal to our GDP.
