Anatomy of a Bank Failure

Most people look forward to Fridays. They see it as the start of the weekend, time to catch up on responsibilities around the house, or just an opportunity to sleep in. Bankers have come to hate Fridays in recent years because it is the day that bank staffs are notified that their bank is being taken over by Federal and/or state regulators. Actually, senior bank executives and directors are notified no later than Wednesday; however, they cannot advise their lower level staff until Friday.

Friday, October 14, 2011 saw four banks close in Aledo, Illinois; Cranford, New Jersey; Ashville, North Carolina; and Gray, Georgia. Georgia, and particularly the Atlanta metropolitan area, with 63, holds the dubious distinction of having the largest number of bank failures in the country since January 2009. In contrast, Nevada saw eight banks fail during that same period.

The failed banks’ size, in terms of assets, ranged from Public Savings Bank of Huntingdon Valley, Pennsylvania, with $46.8 million to Colonial Bank of Montgomery, Alabama with $25 billion in assets. July 2009 was the month with the single highest number of bank failures during that period. The 24 banks that failed had combined assets of over $10 billion. That month alone cost U.S. taxpayers over $3 billion.

The FDIC maintains a “problem bank” list. The banks on the list are advised during regular or special bank examinations of regulatory deficiencies. These problems can range from undercapitalization, over-concentration of loans of a certain type such as commercial or residential loans, or even deficiencies in the makeup of the bank’s board of directors.

Generally, customers should not worry about their accounts since most banks are replaced by larger, stronger banks. Stronger, well capitalized banks earn the privilege of being placed on a list that allows them to acquire weaker failing banks. The acquiring bank is told in advance of the target bank. Next, it signs a non-disclosure agreement and an agreement with the FDIC to assume the target bank’s deposits. Finally, it takes over branches and other assets it may want and continues banking relationships with the target bank’s customers.

The FDIC is often appointed as receiver for failed banks including state charted banks. FDIC officials and state regulators typically arrive at the bank branch around 4:00 PM. Moving with efficiency and speed, they put up closed signs and advise customers that they can still use ATM machines or return to the branch on Monday. The employees are then placed in a room and are told they no longer work for the bank.

Some employees are terminated immediately and are sent home. Others are kept on to assist the FDIC and its asset managers in winding up the bank’s affairs. This includes some loan officers and others with institutional knowledge of the bank’s business. Senior executives and directors are typically terminated immediately but are required to remain available should the FDIC or the asset managers have any questions regarding the bank’s business.

The FDIC has brought former experienced employees who have retired or moved to other jobs back to the agency in the past three years to help with the increased number of bank failures. These employees include clerical staff, bank examiners, compliance examiners, economists, information technology staff, and financial analysts. Some former bankers have spent years moving from failed bank to failed bank, working in stints ranging from a few months to as long as two years.

Most failed banks’ assets, such as bank accounts, branches and loans are sold to other banks or institutions. However, those banks that are not sold are operated, sans banking and lending operations, by the FDIC until it sells off all the assets including furniture and fixtures.

Banks whose accounts and branches have been sold will have a “sock” placed over the former signage on the Friday the bank is taken over and a new “sock” containing the acquiring bank’s name will replace it over the weekend. Monday morning, the bank reopens on time with the new bank’s name and often with the same most visible employees, tellers and branch managers. The greatest problem for the new bank will be to assure the customers that they still have access to their bank accounts.

The FDIC presently insures deposits including principal and any accrued interest through the date of the insured bank’s closing, up to the insurance limit of $250,000 per depositor, per insured bank, for each account ownership category. Types of accounts insured include checking accounts, negotiable order of withdrawal (NOW) accounts, savings accounts, money market deposit accounts (MMDA) or time deposits such as a certificate of deposit (CD) and dollar-for-dollar accounts. Special provisions have been put in place from December 31, 2010 through December 31, 2012, that fully insures all noninterest-bearing transaction accounts regardless of the account balance and the ownership capacity of the funds. This coverage is available to all depositors including consumers, businesses and government entities. The unlimited coverage is separate from, and in addition to, the insurance coverage provided for a depositor’s other accounts held at an FDIC-insured bank.

A single bank failure could cause a breakdown of the public’s trust in our nation’s banking system. Therefore, the FDIC’s mandates and procedures ensure that nothing undermines public confidence in federal deposit insurance or the banking system.

Andras F. Babero, Esq.

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