Last week's takeover of check processor Nationar by the New York State Banking Department pointed to several shortcomings in the way the trust company was seized, industry officials said.

High on the list of bankers' criticisms was the timing of the seizure - early in the morning of Feb. 6 - demonstrating what they said was a failure to foresee the consequences for the payments system.

Several industry sources, who requested anonymity, said it was unusual for an institution to be taken over on a Monday morning. The New York State Banking Department and the Federal Reserve should have seized Nationar after the close of business Friday if they knew that the bank was insolvent, officials said.

The main line of business of Nationar, formerly known as Savings Bank and Trust Co., was providing check processing services to savings banks, credit unions, and retailers in the New York area. It processed about $90 million worth of checks daily.

"This whole situation . . . kind of caught us by surprise," said one East Coast banker whose institution was owed over $1 million by Nationar clients when the company was seized.

The banker said his institution was left in the lurch for the better part of a week before it recovered approximately $1.3 million from Nationar.

"We did try and draw down on Monday against cash letters that we sent on Friday night," said the source, who added that his bank had recently found Nationar to be sound after reviewing several correspondent bank relationships. "We were unable to draw down against those cash letters" until Feb. 9.

But what distressed him the most was the lack of information from regulators, the banker said. He said that although his bank was confident it would eventually receive its money, the lack of a public statement by regulators was disconcerting.

"There was virtually no information available to us from any source as to why they took the action and what the chances were that we were going to be able to collect," the banker said.

He added his bank will revisit its procedures in assessing the risks on where it sends its cash letters. "Ultimately, the responsibility lies with us."

Meanwhile, others said the seizure created a week's worth of chaos for the New York Clearing House Association, which spent marathon sessions unwinding or updating automated clearing house transactions.

"As I understand the Nationar problem, it festered all day long" on Feb. 6, said George White, president of White Papers Inc., a Montclair, N.J.- based payment systems consulting company.

"It was apparently resolved at four o'clock in the afternoon, but it still held up a million ACH transactions from being processed."

Mr. White said at least Nationar's seizure would serve as an example for regulators.

"This illustrates how important it is that if a failure of an institution occurs, particularly one that is settling for others as well, that the regulatory authorities have procedures in place on how to handle it," Mr. White said.

Thomas M. O'Brien, president and CEO of North Side Savings Bank, Floral Park, N.Y., said the run on Nationar occurred following reports of potential liquidity problems.

"Confidence became a problem and that threatened liquidity," Mr. O'Brien said. "I think that's what caused the Banking Department to act."

Neil D. Levin, acting superintendent of the Banking Department, explained that the seizure came after several marathon meetings conducted over the weekend Feb. 4, in an effort to save the institution.

"There was a good chance that we could have made some changes that would have meant not taking possession, so we went the extra mile and tried to do that," Mr. Levin said. "Unfortunately, we couldn't work it out."

Knowledgeable sources said Nationar's board of directors attempted to recapitalize Nationar in an effort to increase the bank's liquidity, but sources said some of the key stockholders balked at that move.

Nationar has approximately $1.5 billion dollars in assets. Besides check processing for other banks, it provided trust and mutual fund administration services for member institutions and had approximately $2 billion under management.

Jonathan D. Epstein contributed to this article.

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