Customers may actually lose uninsured deposits in latest failure

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WASHINGTON — For the first time in nearly nine years, an acquirer of a failed bank agreed to purchase only the institution’s insured deposits, making it likely that some customers will not recoup all of their uninsured funds.

The Office of the Comptroller of the Currency late Friday closed the $166 million-asset Washington Federal Bank for Savings in Chicago. The Federal Deposit Insurance Corp. announced a deal to sell the bank’s two branches to Royal Savings Bank, also in Chicago. It was the eighth bank failure for the industry this year.

But Royal Savings acquired only the insured deposits of Washington Federal, a break from recent practice. The FDIC said about $11.6 million of Washington Federal’s $144 million in deposits exceeded the $250,000 federal deposit insurance limit, although that estimate may change. Uninsured depositors may later receive a portion of their uninsured amount as the FDIC sells off more of the failed bank’s assets.

To be sure, the FDIC has cleaned up failures in recent years where customers only received their insured deposits, but those were in cases where there was no acquirer for the failed bank’s operations.

The last failed-bank acquisition where only insured deposits were covered was announced on Jan. 23, 2009, when 1st Centennial Bank failed in Redlands, Calif.

Throughout most of the financial crisis and aftermath, failed-bank buyers typically bid on all of a bank’s deposits. That became the norm after the 2008 failure of IndyMac Bank in Pasadena. Calif., which was one of the costliest failures of all time. Without a buyer initially, the FDIC took over the bank as conservator and agreed to cover the insured deposits, leaving many customers on edge about the status of their funds.

In the failure announced Friday, Royal Savings Bank agreed to purchase $23.7 million of the failed bank’s assets, and to pay the FDIC a 1.26% premium for the insured deposits. The failure was estimated to cost the Deposit Insurance Fund $60.5 million.

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Failures M&A Community banking Deposits Deposit insurance Policymaking FDIC