Friday, July 11, 2014

This Week in Bank Failures

Failed: Bulgaria cannot rehabilitate the country’s fourth largest bank, CorpBank, after a forensic audit revealed asset problems on a massive scale. The banking license is revoked, the bank will be put into bankruptcy, the investigation has been referred to prosecutors, and the bank’s largest stockholder is under arrest. Loan documents for around 65 percent of the bank’s portfolio cannot be found, and auditors believe the documents were destroyed late last month specifically to thwart their audit. The arrested stockholder is tied to many of the largest loans with documents missing, and he is also suspected of stealing $150 million from the bank during the recent bank run. Next week the good assets and deposits will be transferred to Credit Agricole, a bank that CorpBank purchased from the French bank of the same name just weeks ago. Credit Agricole was nationalized today, and it is being prepared to return to normal operation on Monday, July 21. The liquidation is expected to cost the country and central bank at least $1 billion, putting new pressure on an already strained national budget. The central bank will not restore deposits lost by associates of the arrested stockholder, but it intends to restore all other deposits.

It has been a rough few weeks for other banks in Bulgaria, with the bank run spreading briefly to at least one other bank, but things seem to have returned to normal at the other banks even as CorpBank has gone into wind-down mode.

Suspended: Early this week the word was “back to normal” for Banco Esperito Santo in Portugal, but it was not to be. There are fears that the bank’s ultimate parent company, Espirito Santo International (ESI), may be insolvent. ESI is based in Luxembourg where authorities are investigating and €1 billion is said to be missing. ESI is the 49 percent owner of Espirito Santo Financial Group (ESG), which in turn is 25 percent owner (before last month, the majority owner) of Banco Esperito Santo. ESG stock was withdrawn from trading because of the problems at ESI. The bank’s stock continued to trade but fell 17 percent yesterday and was suspended, then reinstated only to fall farther today in volatile trading after the stock was downgraded. In all, the bank’s stock has fallen by half in the past month. The financial problems at ESI have stoked fears about the state of the national economy in Portugal, though some of the business difficulties are centered farther south in Angola. The bank’s potential exposure to the problems at its parent and affiliate companies is said to be roughly €1 billion, most of that in loans to ESG. It is not, by itself, a large enough exposure to render the bank insolvent. The problems will not be resolved until there is a credible accounting at ESI, and that could take a couple of weeks. Today fears about the bank, Portugal, and the euro zone dampened stock markets worldwide.

Restructuring: Reform is on again at Vatican Bank with the appointment of a new CEO and new independent directors. One of the first changes will be the separation of investment banking from transaction processing. The previous pope had, as one of his last actions before retiring, appointed a caretaker CEO to suspend a previous program of reforms. Instead, the bank spent a year cleaning up its portfolio. As it revalued many questionable assets, it took charges roughly equal to one year of net income. Outside auditors and experts will be a regular part of Vatican Bank’s operations going forward.

Cost-cutting: New Jersey’s Sun Bancorp announced a series of drastic cuts. The bank holding company for Sun National Bank is cutting staff levels and operating expenses by 38 percent overall, closing its home mortgage subsidiary Sun Home Loans, closing its syndicated loan desk (for sharing business loans among multiple banks), and seeking buyers for most of its $96 million portfolio of problem loans. It is selling seven shore locations, most in Cape May County, to Sturdy Savings Bank, based in that county, in a deal to close in early 2015. The acquiring bank is paying an unusually high premium of 8.765 percent on deposits to acquire the branch operations. Sun Bancorp is seeking buyers for several more of its 25 remaining branches in the southern part of the state. In central New Jersey, it is closing four less-used locations, including one that closed in June. The headquarters is also moving north to its executive office building in Mount Laurel as the bank vacates its Vineland headquarters. The bank has a new CEO and plans a one-for-five reverse stock split one month from now. The holding company lost an eye-popping $50 million in 2012 and has lost nearly half as much since, but the announced cuts are on a scale that could possibly restore the bank to profitability.

Federal budget: The Export-Import Bank of the United States, a federal agency that acts as a lender of last resort and occasionally as dealmaker for U.S. exporters, is on the chopping block. It could close in September as House Republicans cannot agree on the agency’s future. Pro-coal senators are also creating a roadblock by attaching a novel form of coal subsidies to an alternate reauthorization bill, a move that would probably prevent that bill from passing the Senate. The Ex-Im Bank has been in operation since 1934 with many of its loans financed by private banks. Among its other accomplishments, it helped to finance U.S.-made construction equipment used to build the Pan-American Highway between 1936 and 1980. It was last reauthorized in 2012. The Ex-Im Bank is self-financing and the closing could cost the government about $1 billion in annual profits; however, the ending of its loan guarantees could theoretically reduce the risk to the U.S. Treasury.

Again, income is not collateral: Detroit used future casino revenue as collateral for some loans, but that arrangement ended when the city filed for bankruptcy, a federal court ruled today. Under U.S. bankruptcy law, a bankrupt entity cannot allocate income except according to a court-approved bankruptcy plan, and any prior contracts or arrangements that purport to do so are voided. The bond insurer Syncora had tried to seize the casino revenue, but has been blocked by a series of court rulings. Naturally, it will appeal again.

Failed: The NCUA yesterday liquidated IBEW Local 816 Federal Credit Union, which had close to 1,000 members, mainly trade union members in Paducah, Kentucky. Insured balances of member accounts will be paid directly to the account holders.