WASHINGTON — As bank failures mount, regulators are coming under increasing scrutiny for how and when they make the final call.
The July 25 closures of two banks owned by an Arizona holding company and the Aug. 1 failure of First Priority Bank in Bradenton, Fla., are cases in point. Enforcement actions warning of the banks' problems were not released in either case until the day they were closed, and critics assert that regulators could have forced the institutions to shift funds into their loss reserves more quickly, which would have reduced their capital ratios and led to earlier closures.
Some say quicker resolutions could also have reduced the cost to the Deposit Insurance Fund.
"The regulators … allowed the banks to operate too long with under-reserving for prospective losses," said Bert Ely, an independent banking consultant based in Alexandria, Va., who is a frequent critic of the Federal Deposit Insurance Corp.
"If the regulators had forced the banks to adequately reserve in a timely manner for their prospective loan losses, then the banks would have shown much weaker capital positions several quarters earlier and would have therefore been seen as critically undercapitalized, if not insolvent institutions, at least several quarters before they were closed," Mr. Ely said. "My thesis is reinforced by the fact that these are both very expensive failures relative to the size of the banks."
Kenneth Thomas, a retail banking consultant in Miami, has studied the First Priority failure.
"This bank could have been closed months ago," he said. The government's "strategy here is to just do them week by week — the worst one — instead of doing them like in the days of the" Resolution Trust Corp. "when there might have been four or five on one day. But they don't want to give that message. Every Friday now at 6:00, I look at my computer, and just wonder, 'Who's next?' "
In both cases, regulators announced enforcement actions on the day the banks failed. In the case of Scottsdale, Ariz.-based First National Holding Bank Co. — whose First National Bank of Nevada and First Heritage Bank in Newport Beach, Calif., were closed — the Office of the Comptroller of the Currency released consent orders dated June 4, and the Federal Reserve Board released its June 16 cease-and-desist order against the holding company.
The FDIC did not announce a June 25 "prompt corrective action" directive against First Priority — which essentially gave the bank 30 days to raise capital or seek a buyer — until last Friday, when the $261 million-asset bank was taken over.
Mr. Thomas said releasing the orders after the banks fail conflicts with promoting public awareness about an institution's troubles.
"The whole concept of making these public was to give an indication of transparency as to the condition," Mr. Thomas said. "When they're making them public in the postmortem, what's the purpose of that? … As soon as these orders are signed, they should become public. Delayed disclosure is diluted disclosure. You might as well not have disclosure if you're going to delay it so much."
Regulators are being too cautious in the wake of IndyMac Bancorp's failure, he said. When the FDIC took over the $32 billion-asset thrift on July 11, long lines of anxious depositors formed outside its California branches.
"They're being so concerned about confidence, to the point of hurting disclosure and transparency. Of course, I don't want to see lines either. But I think I've got to balance this off with the whole concept of transparency and disclosure," he said.
The failures come at a time of heightened scrutiny of regulators — particularly the FDIC — as turmoil in the mortgage markets has led many experts to predict a steady flow of failures through yearend.
(The agency is soon expected to update its "problem list" of banks, which stood at 90, with $26.3 billion of assets, at March 31.)
The spotlight has created a new sensitivity at the agencies, as criticism of their response to the turmoil — especially in the wake of IndyMac's failure — abounds.
They do have their defenders.
"You can't Monday-morning-quarterback the regulators," said Tanya Wheeless, the president of the Arizona Bankers Association.
Walter G. Moeling 4th, a partner at Powell Goldstein LLP in Atlanta, said regulators are moving prudently.
"It's not necessarily waiting too long," he said. "FDIC's primary purpose is, number one, to keep a bank from failing. They only want to step in if there is no hope that a bank will make it through traditional free-market forces."
The First National Holding failures had another interesting twist. A third bank, the $2.8 billion-asset First National Bank of Arizona, was merged with the Nevada bank on June 30. The Scottsdale bank, with a mortgage division run by a son of the company's chairman, Raymond Lamb, proved to be the heart of the operation's problems, with a portfolio overrun by troubled commercial real estate loans and alternative-A mortgages, including those tied to properties out of state.
Why regulators allowed the consolidation or whether they encouraged it is unclear. The FDIC declined to comment on any part of this article, and the OCC defended its actions.
"There's quite a bit of information available to the public about the financial condition of a bank," said OCC spokesman Robert M. Garsson. "The call report just has a huge amount of data. The analysts get it, and pore over it, and I don't believe very many people rely upon the presence or absence of an enforcement action to make a decision about whether to keep deposits at a bank."
According to FDIC data, the Arizona bank had lost $131 million in the first quarter and had $260 million of assets in nonaccrual status, a 420% increase from a year earlier.
"We have some other banks with problems" in Arizona, "but this one went over the cliff very rapidly," said Ernest Garfield, the owner of the Scottsdale consulting firm Interstate Bank Developers Inc.
Meanwhile, First Priority was the first bank to fail in Florida under the weight of a disastrous construction and development market on the state's west coast.
The bank, chartered in 2003, also pushed lending outside its immediate market in Manatee and Sarasota counties. Its troubled condition was reflected in the zero premium paid by SunTrust Banks Inc. to assume First Priority's insured deposits.
"About a third of their loans were outside of their local assessment area," said Mr. Thomas. "The biggest issue was, they just got caught up in their growth strategy. Like a lot of new banks, they focused on growth over profitability.
By the end of the fourth quarter of 2007, nonperforming loans had risen to 22.6% of the bank's portfolio. It lost $3 million in the first quarter, according to FDIC data, and its Tier 1 capital ratio at that time was 4.79%.
"At the end of the March quarter, they were showing about 4 or 5% capital, and at June 30 they were like 0.7%," said Ralph F. MacDonald 3rd, a partner in the Atlanta office of the Jones Day law firm.
"Once that" second-quarter "call report was filed, I don't think the regulators had any choice under the law but to fail them."
Mr. Garsson acknowledged that prompt corrective action requires the agency to move quickly once it's clear a bank will "incur losses that will deplete its capital, or that it's no longer viable."
But he noted that in the case of the First National banks, "in the weeks and months preceding the closing…there was a reasonable prospect of the bank being able to raise additional capital, and it seemed reasonable and prudent - absent liquidity problems - to give the bank time to work with investors."
Mr. Garsson added that the merged banks "still had a significant amount of capital at the time of its closing, so I think it would be hard for anyone to argue that we waited too long to close it."
Others agreed, saying the regulators properly identify banks' problems and close them when warranted.
"You don't want them to act prematurely because you'd like to have the banking system and the private sector resolve itself, as opposed to the FDIC and the government," said Mr. MacDonald.