Friday, October 26, 2012

This Week in Bank Failures

Closing a bank is meant as a low-key, matter-of-fact kind of process, in order to avoid adding to any anxiety that bank customers might already be feeling. I saw a glimpse of this tonight when I took these photos of the Lionville branch of NOVA Bank in Exton, Pennsylvania, about three hours after state regulators closed the bank. There was nothing about the sign out front that indicated that anything had changed. The only hint that something unusual was going on was the number of cars in the parking lot, about seven, and several people at work in the building, hours after it would normally have gone dark for the night. But the sight was hardly anything that would catch the attention of someone passing by.

In spite of the innocuous appearance, the bank branch pictured here is closed for good. Most bank branches that close reopen the next day or the following week as branches of an acquiring bank. That was not the case at NOVA Bank. The FDIC will mail checks to depositors on Monday.

NOVA Bank had about 10 locations in southeastern Pennsylvania along with two in New Jersey. It was a midsized bank with almost half a billion dollars in deposits. It had more than its share of problem loans. It also had a criminal scandal, in which the chief lending officer was found to have taken money from customers’ lines of credit. The FDIC banned the officer in question in January and took a closer look at the bank’s financial controls.

The FDIC has appointed National Penn Bank as an agent for customers’ federal government direct deposits, but only at seven locations and only for a limited time. Customers should make new banking arrangements immediately beginning on Monday.

It is far more work for the FDIC when it has to wind down a bank. One of the first tasks is to figure out who all the depositors are. All the accounts for each depositor have to be put together to determine whether the deposits in aggregate fall under the $250,000 FDIC insurance limit. This has to be done over the weekend so that the FDIC can send checks to depositors on Monday. Later, the FDIC has to sell off all the assets, including loans, real estate, and banking equipment. All this work means that the costs to the Deposit Insurance Fund are higher in cases where the FDIC cannot find a buyer for a failed bank. The FDIC does find a buyer for more than nine out of ten banks that regulators close.

The low-key nature of bank closings also means that you can rarely tell in advance which banks are likely to close. Sometimes I can guess that a specific bank is likely to go under soon, but I will not say so directly except in the most extraordinary circumstances. The reason people in banking are so reticent with these opinions is that we don’t want to contribute to a run on a bank. A run can ruin an otherwise healthy bank, and it can hasten the demise and add to the costs of a bank that’s on the brink. Of course, I don’t want you to lose your money in a bank failure. If you have more than $250,000 in the bank, you need to have multiple banks. If you depend on money to function from day to day, you may need to be holding that much money in cash or otherwise outside of the banking system. You are less likely to be inconvenienced if your credit card is not at the same bank as your deposit accounts.