Friday, June 20, 2014

This Week in Bank Failures

Turmoil at two of Europe’s giant banks became serious enough today to lead stock markets to suspend trading in the banks’ respective stocks.

At CorpBank in Bulgaria, the problems surfaced with media reports that linked the bank to an official scandal. This led to a run on the bank. After several days the bank ran out of cash. It closed its doors, no longer able to pay depositors. The Bulgarian National Bank put CorpBank into receivership for a stated period of three months. The central bank says that CorpBank remains financially sound, though it is auditing the books to make sure, and it says it hopes to restore the bank to normal operation in September. For now, though, there are stiff limits on withdrawals and the bank is prohibited from making public statements. CorpBank is the country’s fourth largest bank and its troubles prompted a general decline in the stock market today and added new pressure to the government’s financial troubles.

Financial trouble has been evident since last year at Portugal’s largest bank, Banco Espirito Santo (BES). As the name suggests, the bank has long been controlled by the Espirito Santo family, but that changed last week. Five quarters of losses totaling €600 million led to a new stock issue to raise capital, reducing the family’s combined shares below 50 percent for the first time. There have also been concerns about accounting irregularities that may have understated losses. Facing the shift in ownership, the accounting questions, and rumors of his departure, the bank’s CEO said today he would resign after a stockholders’ meeting July 31. The imminent loss of the CEO made the bank’s stock more volatile than it was already, leading to a stock trading suspension that is expected to last for a few days.

Accused: A mortgage-backed securities fraud case against Bank of America will go forward after a federal court ruled that the government’s case was strong enough. The bank offered few arguments against the government’s allegations and evidence, leaving the court with no rationale to dismiss. The ruling comes at an awkward time for the bank, which flatly rejected a Justice Department settlement offer last week. Now the bank is trying to restart settlement negotiations, but it is embarrassing itself by requesting a meeting with the Attorney General, something that is not likely to happen quickly.

Cuts: Halfway across the country, Bank of America is preparing a list of branches to close or sell in Kansas. The bank plans to keep just under half of its branches in the state.

Paying up: GE Capital Retail Bank, which is in the middle of changing its name to Synchrony Bank, is paying $174 in penalties and $56 million in restitution. This will settle a case of deceptive marketing tactics and racial discrimination in its credit card operations.

Failed: Two banks named Valley Bank were closed by state regulators tonight. Both were operating subsidiaries of Iowa-based River Valley Bancorp, and the problems at the new bank in Florida may have doomed the older, larger, and more sensibly named bank in the Mississippi River valley in Illinois.

In Broward County, Florida, Valley Bank, with four locations, was closed by state regulators. The failed bank had essentially run out of capital around the end of the first quarter. The Seminole Tribe of Florida was looking into buying and restoring the bank a month ago, but that transaction fell through. Tonight, it was a local competing bank, Landmark Bank, that assumed the deposits and purchased the assets of the failed bank, accelerating a planned expansion in the county.

In northwestern Illinois, state regulators closed the Valley Bank there. Its 13 locations and $360 million in deposits are being transferred to Missouri-based Great Southern Bank, which is also purchasing most of the assets.

River Valley Bancorp had sold off its other banking subsidiary, Freedom Bank, based in Sterling, Illinois, in November. The buyer was Heartland Financial USA, Inc. The Fed had ordered River Valley Bancorp to undertake capital conservation measures at the end of 2009 because of loan losses at its banking subsidiaries. More recently, regulators had complained that the holding company executives trying to manage banks in two widely separated states were not paying enough attention to operations at either bank.

River Valley Bancorp is not to be confused with a similarly-named holding company and bank in Indiana, nor is it associated with a similarly-named bank in Wisconsin and Michigan.