I was wondering about the slow response last year by regulators to banks that were in dire condition, and I was not the only one who remarked on it. Now, reports from the regulators themselves are asking questions about their response in some situations, especially involving smaller banks. Some of the bank failures occurred after banks made drastic and disastrous changes in their business models, changes that regulators saw but often did not look closely at until two years or more had gone by.
Although the regulators could not admit this, much of the problem is political. The Bush administration sought to paint a rosy picture of the faltering economy of 2002–2006, and this created pressure on all the enforcement arms in Washington, pressure to take a hands-off approach to any profitable business. One of the results of this was a pattern of accounting irregularities by which businesses, including banks, reported profits that did not actually exist, while regulators looked the other way.
The risk of this political pressure continues now, as the Obama administration seeks to persuade the public that an economic recovery is underway while the economy itself continues an eerily steady downward slide. A president is always obliged to be upbeat about his country and its prospects, but we are in for trouble whenever that mentality extends to regulators looking at the actions of individual companies. Regulators need to be skeptical in order to discover problems so that the problems can be corrected. This is especially true in banking.
It is important that bank inspectors discover problem banks before the public does. Regulators can respond to a problem bank in an orderly way; all the public can do is rush to the bank to take their money out. That’s something that has happened often enough in the past year to be worrisome; if it becomes a habit on the part of the public, it could get out of hand and temporarily shut down the entire banking system. Already consumers are keeping less of their money in banks because of the perceived risk, and the smaller deposit base makes it harder for banks to operate. Regulators could help restore confidence in the banks by responding more quickly to the obviously hapless banks, instead of waiting for month after month, and headline after headline, before finally taking action.
Consumers remain under pressure with wages flat, employment declining, credit getting tighter, and savings being depleted. As a result, banks are having more trouble than ever with consumer loans, according to reports released this week covering the month of May. Consumer loans may continue to deteriorate for another two years, as unemployment rises further and wages stagnate while prices begin to increase again. JPMorgan Chase and Capital One are particularly at risk to consumer loan defaults because of their aggressive credit card marketing, and Bank of America also because of its outsized exposure to consumers in California.
President Obama introduced a token package of banking reforms Wednesday. The package includes substantive steps toward regulating hedge funds, but the difficult questions about systemic risk in the banking system, the derivatives trade, banking governance, and similar issues are apparently left to be addressed after the health of the economy improves. The issues involved are so complicated that Congress may not be able to schedule all the hearings it will need to hold before the year is over. And events that occur between now and then will probably sweep aside much of the new proposal, as Congress is forced to seek answers to bigger problems that Obama’s plan does not address.
Among the three banks that failed tonight, the largest was Cooperative Bank of Wilmington, North Carolina. It had operated for 111 years and had nearly $1 billion in assets. Its deposits were turned over to First Bank, of Troy, North Carolina, which is also purchasing 97 percent of the assets, with the FDIC providing partial loss protection on the assets.
First Bank is a regional holding company with dozens of offices in North and South Carolina. By adding the 24 Cooperative Bank locations, it gains a much stronger presence in the coastal counties, especially in North Carolina.
Cape Fear Bank failed three months ago in the same area, stung by the faltering real estate market along the North Carolina coast, and the same economic tides may have also swamped Cooperative Bank. The stories are very different, though; Cape Fear Bank was half as big, only ten years old, and seemingly directionless, while Cooperative Bank looked careful and stable by comparison.
Three hundred miles to the west, yet another bank failed in the greater Atlanta area. Southern Community Bank had five offices in Fayetteville, Georgia, and two nearby towns south of Atlanta. It had about $300 million in deposits. United Community Bank is assuming the deposits and purchasing 98 percent of the assets of the failed bank, including the five offices. The FDIC is providing partial loss protection on many of the assets.
United Community Bank is focused mostly on the highlands in far northern Georgia and neighboring areas of Tennessee and North Carolina, but it has a presence in the Atlanta metro area also. The new offices fit with its strategy of adding branches in the suburbs on all sides of Atlanta.
Southern Community Bank had overhauled its operations last year after difficulties with real estate loans, but was then hit with new problems as the national economy declined. By March, 39 percent of its loans had problems.
A smaller bank failed tonight in Kansas. First National Bank of Anthony had six offices and $142 million in deposits. Two offices operated under the name First National Bank of Johnson County. SNB Bank of Kansas is taking over the deposits and acquiring substantially all of the assets, with the FDIC providing partial loss protection on most of the assets. SNB Bank of Kansas is the Kansas presence of an Oklahoma-based bank holding company. This was the third bank failure in the Kansas City area this year.
The FDIC estimates that tonight’s three failures may cost it $363 million. Forty FDIC-insured banks have failed so far this year.