US Banker  |  May 2008

By Anthony Malakian

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All was quiet on the bank-failure front, as it had been for several years. Then came August of 2007, a turning point for the industry when the subprime-mortgage meltdown began to expose the decay in the financial system.

In January, the FDIC announced it expected the number of community-bank failures to rise significantly — and would hire 138 new employees to handle the uptick. Sprinkle in the collapse of Bear Stearns and Federal Reserve Chairman Ben Bernanke’s prediction to the Senate Banking Committee of more bank failures among small and de novo banks — and the recipe is near perfect for high anxiety.

Yet, today’s bank failures have nothing on the savings-and-loan crisis of the 1980s and early 1990s, when the number of bank failures—hundreds every year—peaked between 1985 and 1992. So far the subprime rot has claimed just four of the nation’s 8,324 community banks. On March 7, $18.7 million-asset Hume Bank, of Hume, MO, was assumed by the Federal Deposit Insurance Corp. Douglass National Bank of Kansas City, MO, with $58.5 million in assets, was assumed in January; Miami Valley Bank of Lakeview, OH, with $86.7 million in assets, was assumed in October; and NetBank of Alpharetta, GA, with $2.5 billion in assets, was assumed in September.

According to the FDIC, 76 banks are currently on its “troubled” list, which it defines as banks with low Camels ratings of 4 or 5. The vast majority of “troubled” banks, say sources, are in a handful of states vulnerable to the subprime-mortgage crisis—California, Florida, Georgia, Michigan and Ohio. However, these banks’ assets together represent just a fraction—$22 billion—of a $13 trillion industry pie.

Since 1981, typically 13 percent of troubled banks end up failing annually, according to FDIC Chairman Sheila Bair. By that estimate, some 10 total banks will fail in 2008. Compare that to 1990 and 1991 when more than 1,400 banks dominated the “troubled” list each year; 271 banks failed in 1990 and 180 banks failed in 1991. In the decade between 1983 and 1992, there were 2,689 failures, compared to only 43 in the decade from 1998 to 2007. Moreover, not one failure was reported between June 2004 and February 2007. And in 2005, when economic conditions were far better, there were 52 banks on the “troubled” list, only 24 fewer than today.

Karen Thomas, evp of government relations for the Independent Community Bankers of America, notes that 99 percent of community banks remain well capitalized. “We are coming off a two-year period where we had no bank failures,” she says. “That’s pretty remarkable. ...It is also important to remember that most banks on the troubled bank list don’t fail.”

Much was learned from the lessons of the S&L days, says Ronald Glancz, the FDIC’s assistant general counsel from 1984 to 1988, and now a partner at Venable. Deregulation of deposits—starting with the Depository Institutions Deregulation and Monetary Control Act of 1980—led to many unbalanced spreadsheets at banks, he says. Banks were free to pay whatever interest rates they liked to boost deposits, but competition against money market funds were fierce. As deposits soared at banks, loans—dominated by fixed-rate mortgages—couldn’t balance the books.

The FDIC and the Resolutions Trust Corp., which existed between 1989 and 1995 to liquidate failed thrifts’ assets, did “a good job” in quickly liquidizing the assets of failed banks, he says. The RTC liquidated 747 thrifts with a total of $394 billion in assets, according to the FDIC.

Today, the FDIC’s director of the division of resolutions and receiverships, Mitchell Glassman, says that the FDIC is more effective in efficiently liquidating the bank’s assets through online auctioning. “It’s leveraging advanced approaches to marketing,” he says. “We sell things with an e-commerce approach and bring a lot of bidders to the table.” (c) 2008 U.S. Banker and SourceMedia, Inc. All Rights Reserved. http://www.us-banker.com http://www.sourcemedia.com

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