As was widely reported Tuesday, Federal Deposit Insurance Corp. officials announced that U.S. banks must ante up $45 billion to replenish the insurance fund that protects bank depositors against loss when banks fail. The fund began the year with $34 billion, which has been depleted more quickly than expected by the steady stream of bank failures this year. The total hit 95 on Sept. 26 with the failure of Atlanta-based Georgian Bank, which is expected to drain $892 million from the FDIC fund.
Though the drumbeat of bank failures is expected to roll on, FDIC Chairman Sheila Bair has publicly reassured depositors that they should have no qualms about the insurance fund’s ability to protect them. Though that safety net for depositors is financed by annual and special assessments that banks are required to pay, the FDIC can also turn to the U.S. Treasury to borrow additional funds if need be. As we reported previously, FDIC insurance coverage for deposits has been boosted from $100,000 to $250,000 per depositor through the end of 2013.
Nevertheless, recently released audit reports by the U.S. Treasury Dept.’s Office of the Inspector General provide an eye-opening, behind-the-scenes view of what prompted at least two of the bank failures that were among the first to begin draining money from the FDIC fund early this year. Both are cautionary tales that underscore the need for more stringent banking regulation that puts consumers’ needs and the nation’s economic health above bankers’ self-interest. All details in the following accounts of banks that went under are drawn from the Treasury Inspector General’s audit reports.
•Ocala National Bank of Ocala, Fla. failed in January 2009, resulting in an estimated loss of $99.6 million to the FDIC insurance fund.
The bank failed because of significant losses within its construction and land-development loan portfolio, which grew rapidly from 2004 through 2006, largely due to 400-percent growth in construction loans. In 2005, the bank owner’s son became chief executive officer of Ocala National, even though he had no previous experience running a bank. The bank pursued aggressive growth through high-risk products, but did not adequately control risk or credit underwriting, according to the OIG report.
The auditors also faulted the Office of the Comptroller of the Currency, which regulates nationally chartered banks, for not taking a more forceful approach sooner and for continuing to assign the bank a relatively high safety rating despite signs of trouble. They said while the bank racked up a net operating loss of $2.3 milion in 2007, it nevertheless paid dividends of $3.9 million to the bank’s holding company, of which the bank’s owner and his family were the majority shareholders. Ocala National also made payments totaling approx $1 million to another company partly owned by the bank owner’s son. “We believe that OCC should have more aggressively examined both of these matters,” concluded the auditors.
•Suburban Federal Savings Bank in Crofton, Md. failed in January 2009, costing the FDIC insurance fund an estimated $126 million.
Suburban had been a family-run thrift focused on residential mortgage lending and deposit services until 2003, when the founder’s grandson took over as chief executive officer, seeking to increase the thrift’s size, with the aim of going public. Suburban got into riskier loan products that auditors said were not adequately underwritten and monitored. The resulting high delinquency rates and losses in speculative loans led to its failure.
The auditors also criticized the Office of Thrift Supervision, the federal regulatory agency that oversees nationally chartered savings & loans, saying the agency “did not adequately address Suburban’s problems early enough to prevent a material loss to the FDIC fund” and “did not adequately monitor the thrift’s actions through field visits” to ensure that any corrections regulators did suggest were actually made.
Under the current bank regulation system, financial institutions can shop for the regulator that will treat them best. This structure, notes Harvard professor and consumer advocate Elizabeth Warren, has contributed to bank failures like those noted here. And it has prompted politicians such as Senate Banking Committee Chairman Christopher Dodd to call for major reforms in the system for regulating banks.–Andrea Rock
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