WASHINGTON — The failure of Silverton Bank of Atlanta on Friday presents new worries to institutions that have relied on the $4.1 billion-asset bankers' banks and others like it, observers said.

Silverton, whose operations were folded into a bridge bank formed by the Federal Deposit Insurance Corp., leaves behind over 1,000 bank customers that used its services, as well as 400 bank stockholders and other institutions that participated in loan deals Silverton originated.

"This is going to have an effect on all the downstream participant banks they sold those participations to," said Ralph MacDonald 3rd, a partner at Jones Day in Atlanta.

The failure, the first ever of a bankers' bank and the industry's 30th this year, created a new wrinkle in the disastrous fallout from the housing crisis hitting the Southeast. Silverton was the largest of the six banks that have failed in Georgia this year. Eleven Georgia banks have gone down since the start of 2008.

It also raises questions about whether regulators should have done more to rein in Silverton. It became a national bank almost two years ago, shortly after it began an aggressive expansion into national markets and started pushing construction and development loans. That $1 billion portfolio helped spell the bank's downfall, regulatory officials said.

The failure is liable to lead to more scrutiny of the Office of the Comptroller of the Currency's decision to let Silverton convert to a national bank, and whether it undertook any subsequent efforts to curtail its commercial real estate activities.

"Obviously they are the primary regulator," said Bert Ely, an independent consultant in Virginia, said of the OCC. "They're the first line of defense to prevent failures."

A spokesman for the OCC said Friday that the "bank submitted a business plan that we believed was workable. It was subject to ongoing supervision, and as we always do with bank failures, we'll be conducting a review."

Some observers said the failure could lead to tighter oversight of bankers' banks to prevent a systemic effect on their member institutions.

The failure "will have an impact on regulatory thinking about bankers' banks," said Camden Fine, the president and chief executive officer of the Independent Community Bankers of America, who previously ran a bankers' bank in Missouri.

Fine said regulators could particularly look more closely at how concentrated bankers' banks are in certain regions, and what impact their troubles could have on community-based institutions.

"Bankers' banks in general could almost be looked at, if you will, as regionally or locally systemic in their risk. When a bankers' bank goes down, that does have an impact on hundreds of other banks. From that standpoint, bankers' banks are systemically important," he said.

FDIC officials attempted to downplay the systemic impact of Silverton's failure and any ramifications it may have for the roughly 20 other banker's banks. They said Silverton's issues remained largely tied to its CRE portfolio, and its failure was not due to its traditional banker's bank activities.

"This institution has the typical correspondent relationship of a banker's bank, but also had a significant investment in construction loans which your typical banker's bank would not," said Pamela Farwig, an associate director in the division of resolutions and receiverships.

Although 400 banks are shareholders of Silverton's holding company, Silverton Financial Services Inc., the potential loss of their investment is not likely to substantially harm them, Farwig said. "This would be a very small piece of a bank's portfolio," Farwig said.

The FDIC has contracted TIB — the Independent Bankers Bank in Irving, Tex., to provide operational support for the new bridge bank, which will allow Silverton's 1,400 client banks in 44 states to maintain their correspondent banking relationships with the least amount of disruption, the FDIC said.

The failure is estimated to cost $1.3 billion to the Deposit Insurance Fund. Silverton was the fifth bank to fail in a week, with a total estimated cost of $2 billion to the DIF.

Just after Silverton's closure, regulators announced the 31st failure of the year, that of the $45.1 million-asset Citizens Community Bank in Ridgewood, N.J.

The FDIC said Silverton had $3.3 billion in deposits at the time of its closure, all of which are expected to be within the FDIC's insurance limits.

The closure was a bad ending for Silverton's ambitious growth strategy. In August 2007 the nation's largest bankers' bank had switched from a state to national charter to make it easier to service banks across state lines.

Under its change to a national bank, Silverton, formerly called The Bankers' Bank, could more easily buy into construction loan participation deals in several markets, as well as make direct loans. It switched names as its traditional bankers' bank role diminished. But the growth plan ran aground in the housing crisis. Silverton's past-due loans in the fourth quarter totaled $78 million, roughly 77% of which were for construction.

Some defenders of the bank argued that its downfall was due less to its aggressive strategy, however, than to loan problems facing its community bank clients, many of which pushed their portfolios into construction and real estate.

Walter G. Moeling 4th, a banking lawyer who represented the failed bank, said it suffered not by expanding its mission, but because it absorbed the losses of its core community bank clients in the Southeast.

"In the end, it can't be stronger than its primary constituents, said Moeling, a partner at Bryan Cave LLP in Atlanta. "In this case, the ultimate issue is the community bank portfolio. That has implications for all bankers' banks."

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