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FDIC Fund Dipped to $13 Billion, Will Shell Out More in Wake of New Bank Failures

Source: Wall St. Journal

Posted on 17 Aug 2009

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The Federal Deposit Insurance Corp., the government agency that insures bank deposits, expects the financial hit to its deposit insurance fund will amount to about 50 percent of the assets at three of five banks that failed Friday. The failures bring the total of belly-up banks to 77 so far this year.

U.S. banks that failed in the past two years were in far worse shape than those that collapsed during the industry's last crisis, a growing problem that the FDIC is facing.

The biggest hit on a percentage basis is coming from Community Bank of Nevada, a Las Vegas bank with $1.52 billion in assets and an estimated cost of $781.5 million. The failure of Colonial Bank, a unit of Colonial BancGroup Inc. that was sold to BB&T Corp., will cost $2.8 billion, or 11% of the Montgomery, Ala., bank's assets.

For the 102 banks that have collapsed in the past two years, the FDIC's estimated cost averaged 25% of assets. That is up from the 19% rate between 1989 and 1995, when 747 financial institutions were closed by regulators, according to the FDIC.

The agency's insurance fund already has dipped to $13 billion, with more than 300 battered banks and thrifts still on an undisclosed FDIC list of problem institutions.

One problem is that so many banks took risks when the economy was booming, and are seeing their capital dissipate with alarming speed.

"Compared to the savings-and-loan crisis, banks these days have gotten much bigger and the economy has gotten much bigger," said Bob Patten, an analyst at Morgan Keegan & Co. "This crisis won't eclipse the last one in size, but the costs to the FDIC are showing the amount of leverage they really had on their books."

Regulators also have been blamed for not taking quick enough action and for allowing zombie banks to limp along. Inspectors general at the Treasury Department and FDIC, which serve as watchdogs, have issued more than a dozen reports that conclude regulators dithered while banks they oversaw plowed ahead with rapid and unsteady growth.

"When you get these failing banks, they are much more like a fresh-caught fish than a fine wine. They don't get better with age and the losses keep piling up." said Bert Ely, a longtime banking-industry consultant.

Integrity Bank, of Alpharetta, Ga., was permitted to keep luring deposits paying unusually high interest rates for more than two years after examiners noted deficiencies in its loan underwriting, according to the FDIC's inspector general. Integrity failed last year, costing the FDIC $295 million.

The FDIC's response to the report about Integrity noted that "greater concern for Integrity's loan administration and underwriting weakness identified could have led to earlier supervisory action."

As the number of bank failures escalates, FDIC officials have been trying to find investors and buyers for terminally ill financial institutions, increasingly by agreeing to shield acquirers from certain losses on assets of the failed bank.

The FDIC and BB&T entered into a loss-share transaction on approximately $15 billion of the $22 billion in Colonial assets bought by the Winston-Salem, N.C., bank. FDIC Chairman Sheila C. Bair said in a statement that losses from Friday's failures "are lower than had been projected."