Friday, May 17, 2013

This Week in Bank Failures

Gotcha banking has turned out to be less lucrative than banks had planned on, as courts order one bank after another to refund fraudulent fees they imposed over the last decade. Some of the biggest schemes involved unexpected overdraft fees on deposit accounts. Billions of dollars were collected in hard-to-explain overdraft fees that are not standing up in court. Courts have mostly ruled that fees assessed only as a result of phantom transactions or other creative accounting by the banks, or where banks did not operate the way they told their customers they did, have to be returned.

The two banks closed last weekend were owned by the bankrupt and rapidly shrinking holding company Capitol Bancorp. A third closure was delayed four days, reportedly by a late legal challenge. On Tuesday, state regulators closed Central Arizona Bank, in Scottsdale, Arizona. North Dakota-based Western State Bank took over the deposits and purchased the assets. Combined, these last three failed banks had $110 million in deposits.

In bankruptcy Capitol Bancorp has been reduced to a stock market value under $2 million. In less than five years it has shrunk from 60 subsidiary banks to just 8. Its remaining banks stay open only because the FDIC has waived the cross guarantee provisions that normally apply to a bank holding company. It is safe to say the FDIC has done this because if the holding company had to make good on the cost of any of its bank failures, all of its banks would have to be liquidated, a scenario that would be costly and is potentially avoidable. All of Capitol Bancorp’s banking subsidiaries operated under the same top-heavy business model, though, so the prospect of more failures under that umbrella seems more likely than not.

Yesterday the NCUA placed First Kingdom Community Federal Credit Union, with 76 members in Dallas County, Alabama, into conservatorship. This means the NCUA is taking over management of the credit union with an eye toward returning it to solvency and sound operation.