Friday, October 7, 2011

This Week in Bank Failures

The U.S. stock market continues to rise and fall according to the latest opinions about the European financial system. This week, stocks were rising more than falling with increasing confidence that European politicians will be able to agree on a course of action.

There is trouble at Dexia, a €500 billion European bank that somewhat evades national regulation by having its operations split evenly between Belgium and France, though it also operates in Luxembourg and has a subsidiary in Turkey. It passed “stress tests” recently, but in reality, it is barely solvent, and may be converted to a bad bank. Under that plan, the bank’s high-quality liquid assets, including slightly more than half of the bank’s assets, would be sold off. Its high-risk and low-quality assets, including European government debt, would be kept on the balance sheet under government control, split between the two countries under an arrangement that could be worked out this weekend. Regulators and the bank’s board of directors hoped to reach an agreement in principle this weekend to avoid a ripple effect in overnight lending across Europe next week.

In the United States, Bank of America this week seemed to be laying the groundwork for shutting down its retail banking operation and branch network. The bank’s web site has been working only in fits and starts since last Thursday night, yet when the bank’s CEO made a statement last night, it was not to apologize for the bank’s failure to serve its customers, but to defend the drastic fee increases it is putting into place three months from now. Often when a business raises prices while cutting back on service, it is conceding in advance that it will lose most of its customers to its competitors.

State banking regulators closed banks tonight in Missouri and Minnesota. In Missouri, Sun Security Bank seemed to be terribly overextended, claiming 29 locations across the state on its web site while reporting just $290 million in deposits at the end of June. That’s just $10 million in deposits per location, a ratio most banking executives would consider unworkable. The bank also had a high proportion of loans for failed or troubled residential real estate development projects.

Great Southern Bank is assuming the deposits and purchasing the assets. Great Southern Bank operates in the same region, but not in the same neighborhoods, so it plans to keep the branch offices operating.

The failed bank in Minnesota was The RiverBank, with $379 million in deposits and 6 locations. It operated mainly in Wisconsin, but was headquartered in the town of Wyoming, Minnesota, north of the Minneapolis-St. Paul metro area. Central Bank is assuming the deposits and purchasing the assets. Regulators realized two years ago that The RiverBank was making too many real estate development loans on the edges of the metro area and ordered it to stop, but it was too late to save the bank from the bad loans it had already made. Nationally and in Minnesota, banks operating on the edges of metropolitan areas have been hit hardest by the declining real estate market.