Friday, February 27, 2015

This Week in Bank Failures

The first large U.S. bank failure in five years occurred tonight when regulators in Puerto Rico closed Doral Bank. It had $4.1 billion in deposits and $5.9 billion in assets as of the end of the year. Banco Popular assumed responsibility for the deposits in an agreement with the FDIC, but the arrangement is not as simple as that. Banco Popular is keeping only 8 of Doral Bank’s branches in Puerto Rico, along with three in New York City. FirstBank Puerto Rico is purchasing the other 10 branches in Puerto Rico. Arkansas-based Centennial Bank is purchasing the five branches located in the western Florida panhandle. Banco Popular is purchasing around half of the assets. The FDIC says it has buyers for another $1.3 billion in assets and will seek buyers for the rest. The complexity of the arrangements makes this one of the most involved bank resolutions to date. Adding to the confusion, the FDIC erroneously announced the bank failure during the day while the stock market was still open. It was an uncharacteristic error from the usually very cautious FDIC, and may perhaps be explained by the one-hour time zone difference between Puerto Rico and the U.S. east coast. The FDIC retracted the report, then reissued it at the end of the day, but the damage had been done, and trading in the bank’s stock was halted after it fell by half in less than ten minutes. The bank failure will cost the FDIC about $750 million.

Doral Bank had been struggling for years and suffered a major setback on Wednesday when an appeals court ruled against it in a $229 million tax case. The FDIC will now file an appeal of that ruling on behalf of the bank. A former officer of the bank was one of several people indicted earlier in the week in a fraud case. The FBI was separately investigating the assassination of a bank executive in 2011.

An HSBC executive admitted to hiding $8 million in bonuses in a Swiss bank account in the name of a company registered in Panama, in part to avoid paying U.K. income taxes on the money. In other testimony, executives acknowledged the difficulties of managing such a large instituation and the extent of reputational damage the bank has suffered as a consequence of its unethical behavior.

HSBC may face a new inquiry in Austria next week after banking authorities there get copies of bank operating documents from authorities in other countries.

U.S. banking profits were stronger in the 4th quarter of 2014, with about two thirds of banks reporting improved profitability. A few of the largest banks suffered profit declines, but those were mostly attributed to legal costs.

Deposit flight in Greece reversed after the details of a bailout extension emerged. The episode demonstrates the way bailouts protect financial institutions at a cost to the broader economy.

In hearings this week, executives of CIT Bank tried to reassure the public that the bank would be made stronger, not weaker, by the proposed acquisition of California’s OneWest Bank.