While the failure pace is slowing, regulators are relying on another avenue to resolve troubled banks: mergers.
Vulnerable institutions are increasingly hearing the mandate "find a buyer" from the Federal Deposit Insurance Corp., Federal Reserve and other overseers, investment bankers and lawyers say.
If the directive is not explicit, it is often implied.
"Have banks been told they should sell? Yes, absolutely, if they can they have been told that. Or they are strongly encouraged," said Ralph "Chip" MacDonald, a partner with the law firm Jones Day.
In some cases they are told officially: Bank of Choice of Greeley, Colo., announced in June that it agreed to sell itself to Community Bank Partners Inc. of Denver, three months after the FDIC ordered it to become adequately capitalized or find a buyer or merger partner.
In other cases, the directive may be unstated, but clear. Serial cease-and-desist orders or memorandums of understanding can threaten an institution's independence because they are costly and distracting.
Regulators that conduct safety and soundness exams are "subtly using M&A as a lever to resolve problems" at "smaller banks with fewer capital options," said Emmett J. Daly, a principal with the investment bank Sandler O'Neill & Partners LP. "It's not written in a policy manual. It's anecdotal. But the kind of pressure that has been imposed upon banks and boards has clearly led some to sell."
Capital Bancorp Ltd., a Lansing, Mich., holding company for banks around the country, has been divesting subsidiaries under a capital-raising plan meant to appease regulators.
In June, it agreed to sell its 16th banking subsidiary in two years, Sunrise Bank of San Diego, for $18.5 million to SKBHC Holdings LLC, a private-equity-owned consolidation vehicle.
Michael Moran, Capital Bancorp's chief of capital markets in charge of divestitures, declined to say whether it had any "particular directive" from regulators to sell assets.
"I think it's fair to say that they've been supportive of the divestiture efforts for very obvious and logical reasons," he said.
Capital Bancorp and its examiners "recognize the constructive measures" of becoming smaller and of using sale proceeds to bolster its other undercapitalized operating units. It owns 21 banks, most of them with insufficient capital levels.
Regulators have several options for ridding the system of bad banks, including shutting them down. But the pace of failures has slowed even as the problem bank list remains large, and there are many theories as to the reason. One is that regulators may want to entice coy buyers and investors to stop waiting for failures and loss-sharing agreements and do more deals.
There is no official policy of favoring mergers as a way to resolve problem bank issues at the FDIC or Office of the Comptroller of the Currency, according to officials with those agencies.
Banks have multiple ways to address loan quality, management or risk issues, including a capital raise, asset sale or a merger. Examiners say they have no preference for one over the other.
"Our responsibility is to ensure a safe and sound banking system so we do expect the boards of troubled banks to fully consider all their strategic options for working out the problems and depending on the circumstances, that may include the possibility of a sale or merger," Dean DeBuck, a spokesman for the OCC, wrote in an e-mail.
Regulators ultimately want to clear the system of problem banks one way or the other, experts say.
There were 48 failures in the first half of 2011, compared with 82 in the first half 2010. But there were 888 banks on the FDIC's problem bank list at March 31, four more than at yearend.
"I've never heard regulators say to a bank specifically 'you need to sell,' " said Robert Kafafian, the president and chief executive of the Kafafian Group of Parsipanny, N.J., which advises community banks on strategic matters.
"Oftentimes regulators put banks into positions where" a sale is their only option.
Most community banks have limited access to the capital markets. It can be difficult for many to stay independent if they have to file a capital plan and execute it under a tight deadline, Kafafian said.
Even if an institution manages to effectively comply with an order, the cost of doing so can be too much of a burden.
The more time a bank spends "running around trying to comply, the less time they are spending on their customers and doing business," Kafafian said. "So oftentimes the business itself starts to suffer."