Academic

Thanks to Gordon and the rest of the Conglomerate crew for inviting me to blog here. I am a loyal reader and am excited to try my hand at writing.

It is a fascinating time for those of us who study banking regulation. On May 9 the Office of the Comptroller of the Currency closed ANB, a national bank based in Bentonville, Arkansas. Last week nine ANB branches reopened as branches of Pulaski Bank & Trust Company.

The Wall Street Journal (link unavailable) blames ANB?s failure on the combination punches of the credit crunch and housing downturn. ANB opened in 1994 and quickly amassed deposits by offering above market interest rates on certificates of deposit and buying deposits from deposit brokers. ANB then lent these deposits to finance speculative housing construction and land development. ANB even opened branches in fast growing areas far from Bentonville, including Jackson Hole, Wyoming and St. George, Utah. Unable to sell the newly constructed homes, developers defaulted on their loans to ANB. With ANB's past-due and non-accrual loans reaching $732 million, the OCC decided to pull the plug.

ANB is the third federally insured bank to fail in 2008 (only three banks failed in 2007). However, it is the second largest bank to fail since 2001. (The largest being an internet-based bank.) Regulators are clearly worried that ANB is only the tip of the iceberg. Earlier this year, the Federal Deposit Insurance Corporation announced plans to beef up its current bank failure staff of 220 with 140 new hires.

Will we really see a significant increase in bank failures? It is certainly possible. However, even with increased failures, I do not think we are looking at bank failure rates similar to those during the savings and loan crisis.

What we can bank on are adjustments to the regulatory oversight of banks. Anecdotal evidence suggests federal and state regulators are already directing banks to increase allowances for loan losses. In addition, if ANB?s failure is indicative of future failures, we may see a return to interest rates caps for deposits and increased restrictions on brokered deposits.