Banking Law

Last Friday, while many bankers were hightailing it to the hinterlands for one of those three-day weekends that everyone loves to "gig" bankers (and government workers) about, the FDIC was busy behind the scenes shutting down two more banks. They were small ones, and although the business press ran obligatory stories giving the facts and nothing but the facts, for the most part the news flew under the radar screens of most of the main stream press.

One of the banks was little Meridian Bank of Eldred, Illinois. With a mere $37 million in deposits and $39 million in assets, the failure is expected to cost the FDIC insurance fund $13 million to $14.5 million. That's a high ratio. The other closed bank was Main Street Bank of Northville, Michigan. With $98 million in assets, the failure is expected to cost the FDIC $33 million to $39 million, which is an even higher ratio. The critics of the OTS were all over the OTS and its Western Regional Director recently for the fact that the failure of $32 billion IndyMac Bank would cost the FDIC as much as $9 billion. As a percentage of assets, the IndyMac failure cost is 28%, the Meridian Bank failure cost is 37% (which is identical to the percentage of the cost of the failure of former OT-regulated thrift Ameribank, a cost that was criticized by some as being high), and the Main Street Bank failure cost is 40%. Obviously, the total cost to the FDIC fund of Indymac's meltdown is well over a hundred times greater than the cost of the failure of Meridian and Main Street combined. On the other hand, the costs of the little bank failures demonstrates that the problem of letting failing institutions linger while their losses mount is not something unique to the OTS. While Ameribank and IndyMac (and the recently kaput Washington Mutual) were OTS-regulated savings banks, Meridian was an Illinois-chartered state bank and Main Street was a Michigan-chartered bank.

Somehow, it's not comforting to know that the states are being as slow to move as are the federal regulators when it comes to staunching the bleeding of broken banks. As the Bloomberg article linked above notes, there were 117 institutions listed by the FDIC as "problems" banks at the end of the second quarter. We hope that the regulators are a bit more "proactive" in recognizing who on that list is merely walking wounded and who's headed for the Grim Reaper come hell or high water. That's easy for blowhards like us to say, and certainly, if we represented an institution on that list, we'd plead for mercy. Nevertheless, in the cold, cruel view of the rest of the banks in this country that are facing as much as a doubling of their deposit premiums to fund the losses of the failures, the sooner the primary regulators throw the ailing banks under the FDIC bus, the better off the survivors ultimately will be.