Newly bailed-out European banking giant Dexia is more insolvent than we thought. About €1.5 billion of its capital since 2006 has been the result of money lent by the bank to two of its largest stockholders, who used the loans to buy stock in the bank. This is not considered a proper banking practice and has long been illegal almost everywhere. In effect, the bank was borrowing money from itself. This was legal at the time in Belgium but the phantom capital caused concern for regulators and is still a problem today as regulators try to keep Dexia afloat.
Austerity budgets may be on the way for the rest of Europe as the European Union tries to work out a solution to the sovereign debt problem that doesn’t lead to the collapse of any more banks. Complicating matters are rumblings that more than a few of Europe’s banking giants are in poor financial condition and may become insolvent even without any loan defaults from member nations.
Occupy Wall Street may already be diminishing the credibility of Wall Street banks, or maybe it is just that the banks’ financial reports are as clear as mud this time around. Either way, the news media and investors weren’t willing to take this week’s quarterly reports at face value, with one news writer describing them with the phrase “funky accounting.” Banks, of course, have used funky accounting for years, but I have never seen the world dismiss Wall Street’s earnings reports in quite this way.
It is a few weeks into the quarter and the time when banks traditionally issue their earnings reports. Reports that look sickly can lead to bank closings in the coming weeks.
It is not only small banks that are failing. Tonight saw the failure of Community Banks of Colorado, with 37 locations in Colorado and 4 in California, $1.33 billion in deposits, and just $50 million more than that in assets. Kansas City-based Bank Midwest is assuming the deposits and purchasing the assets. Bank Midwest’s holding company, which was formed two years ago specifically to acquire troubled and failed banks, already has a presence in Colorado, and that will become much larger with this new acquisition. The holding company is considering setting up its headquarters in Denver.
The failed bank has been operating under a regulatory order only since February, when the Fed determined that its capital was running out. The bank explained its problems as the result of a decline in resort real estate in Colorado.
Three $200 million banks also failed tonight, two in Georgia and one in Florida.
Old Harbor Bank had seven branches along Florida’s Gulf Coast north of St. Petersburg. It was ordered to raise capital last year, and tried to arrange a deal to be bought out. Deposits and assets are being transferred to Boca Raton-based 1st United Bank.
Two banks failed in the greater Atlanta area. Decatur First Bank had five branches clustered around Decatur, Georgia, east of Atlanta. Deposits and assets are being transferred to Atlanta-based Fidelity Bank.
Community Capital Bank had two branches in towns south of Atlanta. State Bank & Trust, which amassed a fortune in new capital to acquire failed Georgia banks, is acquiring the deposits and assets. This is State Bank & Trust’s seventh such acquisition in the Atlanta area.