Friday, February 19, 2010

This Week in Bank Failures

The Fed has started the slow process of relaxing its crisis posture. It raised the discount rate from 0.5 percent to 0.75 percent. That may be seen as a token move, but it is the first rate increase from the Fed in years. A discount rate of 0.75 percent still has to be considered an emergency rate, a high-risk posture that tends to destabilize the economy and the banking system, but the rate increase brings it one step closer to normal interest rate levels. The Fed also has apparently stopped buying mortgage-related assets and is preparing to sell some of them. This comes at the same time that the Treasury is preparing to sell another round of the securities it obtained in 2008.

In another sign of a relaxing banking system, large banks are starting to hire some of each other’s executives. There were several such moves announced this week, in an industry that has seen an unusual gap in high-profile hirings over the past 18 months.

The OTS closed La Jolla Bank tonight. The bank had 9 locations in California and 1 in Dallas, and $2.8 billion in deposits.

OneWest Bank is taking over the deposits and purchasing the assets. OneWest, one of the largest banks in California, was created last year out of the IndyMac Bank failure.

It was the second bank failure in La Jolla in less than three months.

La Jolla Bank had been actively pursuing foreclosures on its nonperforming real estate loans, which as of September were more than one tenth of its assets. At that point, the bank received a cease and desist order from the OTS. The bank was also squeezed by the high interest rates it was paying on CDs.

These smaller banks, each with less than $400 million in deposits, were also closed tonight:

  • George Washington Savings Bank, with four locations in the Chicago area. State regulators had issued a cease-and-desist order on December 4. Successor is Ohio-based FirstMerit Bank.
  • Marco Community Bank, with one location in Marco Island, Florida. The Fed had issued a prompt correction action order at the beginning of the month because of the bank’s dwindling capital. Successor is Mutual of Omaha Bank.
  • The La Coste National Bank, in Texas. Successor is Community National Bank, of the local area.

The FDIC estimates costs of $1.1 billion for tonight’s bank closings.