Friday, January 15, 2010

This Week in Bank Failures

“We want our money back.”

That line gives you an idea of the unapologetic tone President Barack Obama took yesterday in proposing a 10-year tax on the liabilities of financial conglomerates with assets of $50 billion or more. Although he couldn’t directly say so, the money in question was mostly the money funneled by the U.S. Treasury to the large banks by way of the credit default swaps of the otherwise bankrupt insurance giant AIG (though who got what via AIG is a closely guarded state secret). It is not just a change in tone, but a change in policy. The White House apparently recognizes that the financial sector is too large for the post-bubble economy and should be discouraged at this point from growing larger.

The FCIC (Financial Crisis Inquiry Commission, no connection to the FDIC) began public hearings this week to find out what caused the financial crisis. Testifying yesterday, Sheila Bair, head of the FDIC, cautioned about the rapid growth of the unregulated “shadow banking system,” which is now about as large as the traditional, regulated banking system. Securities regulations aren’t of much use in accurately labeling mortgage-backed securities, she said, but banking regulators currently have little authority over them. Bair called for regulatory incentives for financial institutions to become smaller and simpler so that they do not present the same degree of systemic risk, and for new regulatory authority to seize and wind down financial conglomerates that go broke in the same way that failed banks are currently resolved.

China is raising reserve requirements for banks. Banks there are required to keep more money in reserve, which means they will have less to lend. The move appears to be motivated in part by banking regulators’ concern that Chinese banks have started to lean toward high-risk loans.

The FDIC found a buyer for almost half of the assets of the recently closed Independent Bankers’ Bank, which was kept operating as Independent Bankers’ Bank Bridge Bank. The buyer is another correspondent bank with a nearly identical name, TIB The Independent BankersBank, based in Irving, Texas. Despite the similar name, the acquiring bank had no prior connection to the failed bank. TIB is buying 42 percent of the assets and is assuming all the deposits. Another buyer, Empire Advisory Group, is buying the corporate trust department for the minimal price of $119,000.

Barnes Banking Co., in northern Utah, failed tonight. It had 10 locations and $787 million in deposits. The FDIC has created a bridge bank that will operate for 30 days to allow customers time to move their accounts, but customers should begin immediately Tuesday morning to make other banking arrangements. Zions First National Bank will be providing operational management for the bridge bank. The FDIC will be mailing checks to CD and IRA account holders.

The bank had been operating for 118 years. It started to show cracks around 2007 and was under regulatory scrutiny by 2009. A prompt corrective order from the Fed issued a month ago had a deadline of today. The bank had held a series of special stockholder meetings, the last one yesterday afternoon, to try to find some resolution to its capital problems. The closing will cost the FDIC an estimated $271 million.

These small banks with less than $100 million in deposits between them failed tonight:

  • Town Community Bank and Trust in Antioch, Illinois. Deposits and 97 percent of assets transferred to First American Bank.
  • St. Stephen State Bank in Minnesota. Deposits and assets transferred to First State Bank of St. Joseph.