Michigan's top banking regulator is planning to kick off a campaign to teach local governments to do their homework before depositing funds in small banks.

Patrick M. McQueen, commissioner of the Michigan Financial Institutions Bureau, said the program responds to the April failure of a community bank that nearly bankrupted a Michigan city and school district.

The program is still being planned. Mr. McQueen said his department will educate municipalities on using public records, such as call report data, to check banks' capital levels before making deposits.

"A de novo or a small bank with $3 million to $4 million of capital shouldn't take in public funds," he told a group of bankers here last week at the annual Michigan Bankers Association conference.

Omni Bank, with $42 million of assets, had only $3 million of capital when it was closed by the Federal Deposit Insurance Corp. in April.

This capital level was not enough to secure $20 million of public deposits from the city of River Rouge, a local school district, the city of Detroit, and other public entities.

The crisis was eventually resolved when seven of the state's largest banks, including NBD and Comerica of Detroit, came to the rescue.

To encourage Shore Bank of Detroit to take over Omni, the banks agreed to buy $20 million in certificates of deposit from Shore Bank, which would secure the public funds for five years.

"There was no way on my watch that I wanted to see public funds lost," said Mr. McQueen, who organized the meeting of the big banks. "Those seven banks saved River Rouge from bankruptcy."

Joseph D. Reid, chief executive officer of Capitol Bancorp, Lansing, Mich., agreed that a municipality must pay close attention to its local banks' performance. But Mr. Reid, whose company has started up six community banks in Michigan since 1994, said local governments should not confuse size with soundness.

"You can have a very small bank with high capital levels," said Mr. Reid.

Mr. McQueen said the goal of the program is not to favor large banks but to encourage public leaders to do the same safety-and-soundness checks on their banks that they do for other investments.

"Just because a bank is FDIC-insured doesn't mean it can handle anything," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.