Friday, July 15, 2011

This Week in Bank Failures

Even in the relatively benign scenarios of the new stress tests, many of the largest European banks don’t have enough capital to cover the likely fluctuations in the asset portfolios they are holding. Bank stress tests are based on scenarios in which nothing surprising or out of the ordinary happens, so they aren’t good predictors of failure. Some observers criticized the stress tests for not considering the possibility of business failures or government insolvency, but it is useful to see that some banks could find themselves in a precarious financial state even if nothing particularly noteworthy happens in the broader economy.

Downgrades continued all this week, with Standard & Poor’s warning today that it would, in effect, downgrade Wall Street if a partial U.S. government shutdown occurs in two weeks. The federal government default and shutdown, tentatively expected on August 2 if Congress fails to act, could happen several days sooner, financial observers said this week, noting that after today, the Treasury has nothing left in its bag of financial tricks. Most of the consequences may still be avoided if the House takes action in the coming week, but the House has unrelated matters on its schedule, so it is looking increasingly unlikely that a federal government default can be avoided. In this scenario, emergency action would be needed worldwide in early August to keep banks from closing their doors.

At closing time tonight, two state-chartered banks in Georgia were closed by state regulators. High Trust Bank and One Georgia Bank, both of the Atlanta area, each had under $200 million in deposits. Ameris Bank is assuming the deposits and purchasing the assets.

One Georgia Bank was chartered in 2006 and was affected by problems in the economy from the beginning. It had fired its CEO last year and hired consultants to try to improve the bank’s flagging fortunes.

Two High Trust Bank shareholders were among a group sued yesterday by the FDIC, which claims they took out many fraudulent loans from Haven Trust Bank, where they were the two largest shareholders, contributing to that bank’s collapse. Their High Trust Bank stock, now worthless, was used as collateral for multiple loans. The loans may have been taken out just to create bank deposits to make the banks appear more solvent than they were. The FDIC sued a total of 15 insiders at Haven Trust Bank seeking to recover funds diverted from the bank before it was closed by regulators in 2008.

State banking regulators in Florida closed First Peoples Bank, which had 6 branches along the east central coast. It had just over $200 million in deposits. Premier American Bank is assuming the deposits and purchasing the assets. The failed bank’s holding company had received $6 million in TARP funds in 2008. At its peak, the bank had a stock market value over $30 million, but that declined to $1 million by the end of 2009. Premier American Bank is taking over the deposits of the failed bank and purchasing its assets.

A small bank in Prescott, Arizona, was closed tonight by state banking regulators. Summit Bank had $66 million in deposits. The Foothills Bank is paying a 0.25 percent premium for the deposits and is also purchasing the assets.

The NCUA liquidated two credit unions that were in conservatorship. Borinquen Federal Credit Union, in Philadelphia, had 8,600 members and had been in conservatorship for less than a month. Vensure Federal Credit Union, in Arizona, had 100 members and had been placed in conservatorship in April. In both cases, the NCUA found no plausible way to restore the credit unions to solvency. The NCUA mailed checks to members for their insured deposits. Each credit union had less than $10 million in deposits.