The party’s over — that’s the message from the UK’s Chancellor of the Exchequer, Alistair Darling, as he describes forthcoming regulations that will put restrictions on compensation at banks. The new rules are meant to prevent banks from rewarding failure. Rules will also require banks to disclose more about the nature of the assets they hold.
Darling’s comments also contained a veiled warning for the United States. As the G20 prepares to tighten restrictions on offshore banking centers, the U.S. risks being put in that category if it allows Wall Street to maintain the current level of secrecy about assets, something President Obama hinted at in a speech last week. What this means is that U.S. regulators will have to require a sufficient level of disclosure about assets and transactions to make foreign regulators comfortable, even if that means being stricter than the White House would like.
As the FDIC burns through its remaining cash, it is working on a plan to borrow money from banks. Borrowing from banks makes sense for the FDIC because banks have to pay an assessment on their deposits to the FDIC every year anyway. A loan to the FDIC can be structured so that it does not have to be paid back. To a bank, this is the most secure kind of loan it can have on its balance sheet.
The FDIC is authorized to borrow from the Treasury, but it may not have to. It can use its line of credit with the Treasury as a loan guarantee, to tap only if contingencies force it to pay back loans suddenly. It makes little difference economically whether the FDIC issues its own debt or the Treasury sells bonds to finance the FDIC. Either way, the FDIC can probably plan on being in debt for the next five to ten years. If the FDIC issues its own debt, though, this may prevent the Treasury from exerting any inappropriate influence over the FDIC.
Is GMAC about to make a quick buck — or just digging itself in deeper? GMAC’s Ally Bank is hiring 10 former employees of Taylor Bean & Whitaker, the mortgage lender that filed for bankruptcy last month under the weight of a criminal fraud investigation in a sequence of events that also included the failure of Colonial Bank. GMAC plans to buy home mortgages from small banks, filling a gap in the market that developed when Taylor Bean & Whitaker shut down. GMAC has been losing money for the last two years and has been experimenting with various business approaches to try to turn its fortunes around. It created Ally Bank in May to experiment with Internet savings accounts and incentive-based loan programs for auto dealers. GMAC needs to make money quickly if it can, to improve its chances of surviving the loan losses it is likely to see if the economy worsens next year.
There was only one bank failure tonight, but it was costly. Georgian Bank became the latest casualty of the downturn in metro Atlanta real estate. Georgian Bank was one of the largest banks in Georgia, with $2 billion in assets and a similar amount in deposits. The bank had been operating since 2001 and had emphasized real estate development loans since 2004. It reported a profit last year, but that probably reflected wishful thinking more than actual success, as loan losses piled up quickly after it took a fresh look at its books early this year. The FDIC had issued a cease-and-desist order in August, ordering the bank to improve its financial condition.
Georgian Bank had only five locations and described itself as serving “high-net-worth individuals.” It is a strategy that leaves a bank more vulnerable to a run. Large deposits are not protected by deposit insurance the way small deposits are, so depositors might rush to withdraw their money on reports of trouble.
Columbia, South Carolina-based First Citizens Bank is purchasing the deposits and assets of Georgian Bank. First Citizens Bank operates across South Carolina and in neighboring areas of Georgia. It is not affiliated with a bank of the same name based in North Carolina, nor with another bank with a similar name operating in the eastern part of Georgia.
The FDIC estimates a cost of nearly $900 million from this bank closing.
Nineteen banks have failed in Georgia so far this year. The economy in Georgia peaked two years before the national economy did, and that is one of the reasons Georgia bank failures are happening faster than in other parts of the country. The epic flooding occurring in northern Georgia and southern Tennessee this week can only hurt the fortunes of banks in that region, as businesses that suffered damage or lost business in the flooding may have difficulty making payments on their loans.
The third quarter ends next week, and there is no doubt that the banks’ new financial statements will give regulators new cause for alarm.