WASHINGTON — The Federal Deposit Insurance Corp. should have been more aggressive in recognizing problems and forcing changes at a failed Texas bank ahead of its collapse, an internal watchdog said in a report released Tuesday.
The FDIC's office of inspector general said in its report that Franklin Bank of Houston failed primarily due to management's "high-risk business strategy." But regulators still should have done more to prevent the bank from failing, auditors said, a collapse that was estimated to cost the government's deposit insurance fund $1.5 billion.
"In the case of Franklin...while recommendations were made and certain supervisory actions were taken over a five-year period, these actions were not always timely and effective," the inspector general's report said.
The finding is the latest in a series of reports from federal watchdogs suggesting that regulators could and should have done more to address risky practices in the banking industry. Those practices, including risky real estate lending and a reliance on volatile funding sources, have led banks to fail at rates not seen since the early 1990s.
In the case of Franklin, the inspector general's office found the bank had weak risk-management controls and was left "unprepared and unable to effectively manage operations in a declining economic environment." The bank was closed by Texas regulators in November.
FDIC examiners did make recommendations to bank management about their business, but the report found the agency didn't always make sure the bank responded to the recommendations. The FDIC, the report said, "could have performed additional analysis, exercised greater supervisory concern, and taken additional action to help prevent the bank's failure" or mitigate incurred losses.