WASHINGTON — Overaggressive growth, reliance on commercial real estate lending and use of brokered deposits were strategies common to banks that failed in the crisis, a government report said Thursday.
The Government Accountability Office examined causes of closures in the 10 states with the most failures between 2008 and 2011, and found that overheated growth fueled by real estate lending was often the culprit.
Smaller and medium-sized banks that failed were more likely to have overinvested in CRE lending while relying more heavily on brokered deposits for funding. Meanwhile, the four largest failed banks examined in the reported — Washington Mutual Bank, IndyMac Bank, BankUnited and Downey Savings and Loan — were heavily invested in nontraditional residential loans such as payment-option adjustable rate mortgages.
"The rapid growth of [small and medium banks'] CRE portfolios resulted in concentrations that exceeded regulatory thresholds for heightened scrutiny and increased the banks' exposure to the sustained real estate and economic downturn that began in 2007," the GAO said. "In addition, these failed banks had often pursued aggressive growth strategies using nontraditional, riskier funding sources and exhibited weak underwriting and credit administration practices."
The report expressed hope that pending accounting proposals, which would require banks to be more forward-looking in setting aside loan-loss reserves, could help moderate failures in future downturns.
"It should help address the cycle of losses and failures that emerged in the recent crisis as banks were forced to write down impaired loans and increase loan loss allowance and raise capital when they were least likely to be able to do so," the GAO said.
The GAO reported positive feedback about the Federal Deposit Insurance Corporation's use of shared loss agreements in attracting buyers for failed-bank assets.
"FDIC officials, state bank regulators, community banking associations, and acquiring banks of failed institutions GAO interviewed said that shared loss agreements helped to attract potential bidders for failed banks during the financial crisis," the report said. "Bank officials that acquired failed banks confirmed that they would not have purchased them without FDIC's shared loss agreements because of uncertainty of the market and valuation of assets."