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Case Study of a Recent Bank Failure

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Pittsburgh Tribune-Review had an article on the recent FDIC take-over of the Metropolitan Savings Bank in Pittsburgh, Pennsylvania. This was the first bank in the nation to be taken over since June 2004. So it's not too common. The State Banking Department cited the bank for unsafe business practices, refusal to cooperate with the examiners and the possibility the bank couldn't meet depositors' demands. The FDIC then came in and took over the operations. $12 million in deposits were sold to a nearby bank. So no customers with deposits under the FDIC limits should have lost any deposits.

One thing noted in the article was how much of a surprise this was for the locals. The bank had been founded in 1892. It was a very small bank with less than $16 million in assets. Bankrate.com gave it 4 out of 5 stars (sound) in its safe-and-sound rating based on September 30, 2006 financial data. BauerFinancial had already delisted it from its database. With the conservatorship of Huron River Area Credit Union (post), some readers had noted that the most important factor may be the current management. Long track records can be irrelevant.

Update: Only insured deposits were transfered to new bank.


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Comments
6 Comments.
Comment #1 by Anonymous posted on
Anonymous
If this story doesn't make a mockery of so-called "ratings" of a bank, I can't imagine what would.

Bottom line for me - have all of your funds -> under <- the applicable FDIC limit REGARDLESS of ANY rating services' "rating".

Yes, according to the referenced story, in this instance, the entire deposit inventory of the failed bank were transferred to a new owner with no losses to depositors regardless of FDIC coverage. Excellent. But why gamble.

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Comment #2 by Anonymous posted on
Anonymous
It may have already mentioned before but with this bank and Huron CU, one has to wonder how reliable and accurate it is to use bankrate and/or other rating systems (ie. Bauer Financial) as a factor when evaluating how solid a financial institution is to deposit money into. I remember there have been several impassioned posts in this forum and FW among others on how people wouldn't entrust their money to a 2 or 3 stars bankrate ratings. How ironic that it's the ones that are 4/5 stars that are the most recent examples of unsound practices!

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Comment #3 by Anonymous posted on
Anonymous
If indeed none of the depositors lost any money (and I don't see where the article says that), then I would say that the rating system worked well.

The ratings measure the financial resources of the institution. It would appear that both institutions had sufficient assets and reserves to allow all of their depositors to be paid off in full, which is all the ratings can be expected to predict.

The ratings were good and no depositor lost any money. That's the bottom line.

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Comment #4 by Anonymous posted on
Anonymous
The article mentioned an on-going FDIC investigation and gave little details on exactly what went wrong and how it was discovered so that FDIC took definitive actions so it would be interesting to keep track of any future reports.
For a bank that been cited for "unsafe business practices" and "couldn't meet depositors' demand", there is no way to justified a 4* rating. I has to wonder about whether the last financial report (sept '06) contained falsified information as to result in such erroneous ratings if so, garbage in garbage out. And we all know such possiblities exist based on wall street history, then ratings if not worthless become little more than insignificant.

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Comment #5 by Anonymous posted on
Anonymous
BG -- In your 2-24-2007 weekly summary, you said:

"However, it was able to sell the bank's deposits to another local bank. So like the Huron case, the federal insurance didn't even come into play."

This isn't accurate. Only INSURED deposits were transferred to the acquiring bank, UNINSURED deposits will only get paid out of liquidation proceeds, amount TBD. See FDIC info page at http://www.fdic.gov/bank/individual/failed/MetropolitanSB.html

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Comment #6 by Banking Guy (anonymous) posted on
Banking Guy
Thanks, I've updated the weekly summary with the removal of this inaccurate statement.

As you mentioned, the FDIC page has all of the official details that the newspaper article left out.

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