Regulator, insurer boosts its staff and provisions as it faces its biggest challenge in decades
ATLANTA – The Federal Deposit Insurance Corp. is one of those agencies with a low profile but essential role similar to plumbing or electricity – you don’t notice it until the power’s out or the basement’s flooding.
These days, the FDIC’s folks are busier with the financial equivalent of fixing burst water mains and dead power lines.
Seventy-five years after it was launched during the Great Depression, the bank regulator and insurer is facing its biggest challenge in decades. Many banks in Georgia and across the nation have been battered by the slumping economy and troubled loans to home builders, developers and homeowners.
Hundreds could fail, some industry experts predict. That could force the agency to make good on its promise to insure most customers’ checking and savings deposits up to $100,000 and some retirement accounts up to $250,000, putting pressure on its insurance fund.
Is the agency, whose combined insurance funds were technically pushed into insolvency during the savings and loan debacle two decades ago, ready for another banking crisis? And how bad could it get?
Despite the frequent gloom on both Wall Street and Main Street, industry players seem confident in the overall resiliency of the banking industry and the FDIC’s ability to shelter customers from bank failures.
The FDIC, which had shrunk to 4,600 employees from 23,000 at the height of the savings and loan meltdown, has been gearing up for another wave of bank failures.
It’s hiring 70 new employees and bringing back 70 retirees to beef up its teams that swoop in, usually over a weekend, to take over and reopen banks under new management.
The FDIC’s Atlanta regional office, which covers seven states from West Virginia to Florida, also recently boosted its bank examiner and professional staff by about 10 percent, to about 300. The agency is also expected to soon raise the insurance premiums it charges banks and thrifts to begin rebuilding its reserves.
The FDIC won’t discuss its projections, but it has been increasing its loss provisions for expected bank failures and adding institutions to its growing “problem” bank list. The list totaled 90 institutions with $26.3 billion in assets at the end of March. The confidential list is expected to be longer when the FDIC issues an update Tuesday.
“We don’t predict numbers of bank failures,” FDIC spokesman David Barr said. “We do realize that there will be more failures, but it’s something that we can manage.”
Georgia a special concern
Even though most of the headline-grabbing bank and real estate problems center on Florida and California, Georgia is likely to emerge as a hot spot, as well.
The state’s banks, which included 109 community banks that were launched since 2000, built up the nation’s heaviest concentration of loans to home builders and real estate developers. Many of those businesses have since gone belly-up, saddling banks with growing piles of bad debt and foreclosed properties.
Nine of the state’s banks recently landed on a top-25 list compiled by SNL Financial based on the so-called “Texas ratio,” which attempts to gauge how likely the institutions will run into financial trouble.
FDIC officials said they expect the Deposit Insurance Fund, which had $52.8 billion at the end of March, to remain sound.
“The losses would have to be pretty catastrophic” to create a deficit, said Arthur Murton, the FDIC’s director of insurance and research. That’s because, Murton said, under a federal reform law passed after the S&L crisis, the agency was given more flexibility to raise the deposit insurance rates it charges banks whenever needed.
“We have a pretty significant fund, and we have the ability to replenish it,” he said.
How bad will it be?
Certainly the FDIC’s and the banking industry’s challenges so far haven’t come close to the challenges of the 1930s and 1980s. Some 9,000 banks failed in the four years before Congress created the FDIC in 1933. Thousands of institutions also failed during the S&L crisis. Year to date, eight institutions have failed.
Georgia has so far gotten off rather lightly, with no bank failures this year and relatively few during those earlier crises. Eight Georgia banks failed in the late 1930s, and 21 collapsed from 1988 to 1992. The largest so far was last year’s shutdown of NetBank in Alpharetta, with $1.5 billion in deposits.
But both the state and national tallies will grow, industry analysts predict.
They expect possibly hundreds of bank failures nationally over the next few years as more borrowers ranging from homeowners to businesses default on loans. How many will depend on whether the economy enters a recession.
“For a lot of banks, the die has already been cast,” said Jeff K. Davis with FTN Midwest Securities. At the low end, he estimates that roughly 100 banks will fail over the next 18 months if falling crude oil prices and recent gains on Wall Street point to a possible turnaround in the economy. That number could swell to 600 failures if the economy falls into a serious recession, although most will be small community banks, he added.
The FDIC will have to absorb “some expensive failures,” but nothing like past waves of bank failures because banks are generally much larger and better diversified, said Bert Ely, a longtime bank industry consultant who has his own firm in Alexandria, Va. “The banking industry goes into this mess much stronger than it was” in those earlier eras, he said.
Some industry watchers say bank failures could wipe out much of the FDIC’s insurance fund, forcing the agency to collect significantly higher premiums from financial institutions in the future. The eight failures this year are expected to cost $5 billion to $9 billion, potentially wiping out up to a sixth of the FDIC’s insurance fund.
Because of the likely drain on the fund, the FDIC is expected to increase deposit insurance rates as early as next month. Otherwise, the losses will push the fund below a statutory minimum of 1.15 percent of insured deposits. The fund equaled 1.19 percent of insured deposits at the end of March.
“As the FDIC incurs losses, those losses will be passed back to the banking industry,” Ely said. “The real party at risk here is the banks.”
But ultimately, the FDIC can turn to Uncle Sam for help. That’s what happened during the S&L crisis, when billions in losses wiped out an insurance fund that covered savings and loan deposits. Congress stepped in and turned responsibility over to the FDIC in 1989, giving the agency extra time to rebuild its insurance reserves. Still, that fund dropped to a deficit of $7 billion in 1991 before it began to recover.
The FDIC doesn’t expect a replay of those events, despite the heavy losses the agency expects from this year’s bank failures. The FDIC’s Murton said the initial batch of shutdowns was probably not a good indicator of future trends. The expected losses were skewed unusually high by last month’s failure of IndyMac Bancorp, he said. California-based IndyMac, with $32 billion in assets, was the nation’s third-largest U.S. bank failure. It is expected to cost the fund $4 billion to $8 billion.
“We had one of the largest and certainly what we think will be one of the most expensive failures at the beginning of the cycle,” Murton said. “We don’t expect to see repeats of that.”
In the event that he’s wrong, he said the FDIC can draw on a $30 billion line of credit with the federal Treasury to continue covering future bank failures. Beyond that, said Barr, the FDIC spokesman, the agency is backed by the “full faith and credit” of the United States. “It’s on the sticker” displayed by federally insured banks, he said.
Gerard Cassidy, a veteran banking analyst with RBC Capital Markets, expects the FDIC to remain sound, even though he projects up to 300 banks will have to close within three years. He expects the FDIC to boost its rates up to 30 percent next month to shore up its insurance fund.
“Although it’s going to be challenging, it’s not going to be all that bad,” said Cassidy, who is credited with devising the so-called “Texas ratio” in the early 1990s to predict which banks or thrifts might fail. “If anyone has a deposit of less than $100,000, they can sleep as soundly as always,” he said.
Still, the FDIC’s and other bank regulators’ performance is getting mixed reviews. Critics say the agencies were too slow and did too little to steer banks away from risky mortgage loans and heavy concentrations in construction and home-builder loans, which account for much of the industry’s expected losses.
The FDIC also was criticized for its handling of last month’s shutdown of IndyMac. Many people waited hours in long lines to withdraw money or check on accounts.
On the other hand, the agency caused barely a ripple when it shut down several smaller institutions such as Bradenton, Fla.-based First Priority Bank, whose deposits were taken over earlier this month by Atlanta’s SunTrust Banks.
“I was shocked that the FDIC did not have IndyMac on its watch list until a month before” its collapse, Cassidy said. “You may have an inexperienced team. … Remember, for the last 13 or 14 years, the banking industry has been pretty benign.”
Barr, the FDIC spokesman, countered that the FDIC has “a good mix of experienced staff.” He said he’s at a loss to explain the unusual level of anxiety among IndyMac’s customers. “They knew their funds were insured. … They still lined up and took their money out,” he said. “We’ve had three failures since IndyMac and they all went smoothly.”
He said the FDIC and other regulators were also aware of the growing risk level in banks’ loan portfolios, and took action. The agencies issued guidance to banks in 2006 to discourage them from making too many loans to home builders and real estate developers, but they had “a very difficult line to walk” at the time, when banks were still prospering from such lending, he said.
“I feel that we did recognize it and did what we could,” Barr said, but “you don’t want to cause a credit crunch.”
Russell Grantham writes for The Atlanta Journal-Constitution.
By RUSSELL GRANTHAM
Cox News Service
Sunday, August 24, 2008