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FDIC Eases Requirements for Buyers of Failed Banks


From the New York Times:
Facing a dearth of traditional bank buyers, the board of the Federal Deposit Insurance Corporation moved Wednesday to relax some of its proposed rules while still imposing tough standards on private equity firms seeking to acquire troubled financial institutions.

FDIC Chairman Sheila Bair described the new rules in this FDIC press release:
The Policy Statement strikes a thoughtful balance to attract non-traditional investors in insured depository institutions while maintaining the necessary safeguards to ensure that these investors approach banking in a way that is transparent, long term and prudent. Most importantly, the statement assures that acquired institutions will have adequate capital, that there will be stability in management, and there will be strong protections to ensure that lending decisions will be both objective and independent. It both protects the interests of taxpayers in a safe and sound banking system, and provides the guidance that investors need to evaluate investments in the deposit operations of failed institutions

With these changes perhaps we'll see more closures of troubled banks. There are a few troubled and sizable banks that have been in the headlines for some time and are still operating. The FDIC is probably in no rush to close these banks if it can't find buyers.

It's much more costly when the FDIC can't find a buyer. For example, the FDIC wasn't able to find a buyer for Community Bank of Nevada that was closed on August 14th. The bank had $1.38 billion in deposits, and the estimated cost to the Deposit Insurance Fund was $781.5 million. As a comparison, Guaranty Bank which failed last Friday and was taken over by BBVA Compass had over 8 times more deposits ($12 billion), but it was only about 4 times as costly ($3 billion).

FDIC's 2nd Quarter Report

On the topic of the Deposit Insurance Fund, the FDIC should be releasing its 2nd quarter briefing tomorrow that provides the state of the DIF along with the new number of banks on the problem list. In the first quarter report released last May, the DIF balance fell to $13 billion and the number of problem banks grew to 305. There have been a lot of bank failures in the second quarter including BankUnited's failure which cost the DIF an estimated $4.9 billion.

Update 8/27/09: The FDIC just issued this press release on its 2nd quarter report. I'll post more on this later today.

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Anonymous   |     |   Comment #1
What's the over/under on DIF for tomorrow's report, zero? I think it all comes down to how well they estimated the losses. If the actual losses are about 2x the estimates, then they could be below zero in spite of any "one-time" fees.

Fun chart here.
Anonymous   |     |   Comment #2
The FDIC is estimated it will need $70 billion to cover bank failures through 2013 — about 5X recent cash holdings of $13 billion. Through March 2009, the FDIC recorded over $19 billion in losses. The most recent failure is Texas Guaranty Bank, at a cost to the agency’s insurance fund of $3 billion dollars.
Anonymous   |     |   Comment #3
The coffers of the Federal Deposit Insurance Corp. have been so depleted by the epidemic of collapsing financial institutions that analysts warn it could sink into the red by the end of this year.

That has happened only once before — during the savings-and-loan crisis of the early 1990s, when the FDIC was forced to borrow $15 billion from the Treasury and repay it later with interest. The government agency that guarantees depositors against the loss of their money in a bank failure may need its own lifeline.

The FDIC on Thursday will disclose how much is left in its insurance fund, and update the number of banks on its list of troubled institutions. That number shot up to 305 in the first quarter — the highest since 1994 and up from 252 late last year.
Anonymous   |     |   Comment #4
There are that many fewer large banks who are potential buyers. Hence, the new rules allow private equity buyers to maintain a failed bank’s reserves “at levels equal to 10 percent of its assets.” Prior rules set a higher requirement, and mandated new owners maintaining a bank’s minimum capital levels for three years.

The theory is that softening these requirements will attract the attention of more potential buyers, bringing in fresh capital to the FDIC.
Anonymous   |     |   Comment #5
Well, according to my calculations of adding up the July thru Today estimated losses (listed), I have the DIF starting Q3 (now) with $10.4B as they say and losing $10.3B so far. They'll do another quarterly "one-time" fee of $5.6B to help offset that, but they still haven't done Corus bank and a few other large ones (plus the dozens of smaller but still large ones). We'll ignore the "too big to fail" ones that they seem to be avoiding even though their books are full of garbage conveniently marked to fantasy (since mark to market isn't necessary anymore) and mentioned in footnotes how they're actually worth tens of billions less.

Regarding this part of the press release:

Total reserves of the Deposit Insurance Fund (DIF) stood at $42 billion. Just as insured institutions reserve for loan losses, the FDIC has to provide for a contingent loss reserve for future failures. To the extent that the FDIC has already reserved for an anticipated closing, the failure of an institution does not reduce the DIF balance. The contingent loss reserve, which totaled $28.5 billion on March 31, rose to $32.0 billion as of June 30, reflecting higher actual and anticipated losses from failed institutions. Additions to the contingent loss reserve during the second quarter caused the fund balance to decline from $13.0 billion to $10.4 billion. Combined, the total reserves of the DIF equaled $42.4 billion at the end of the quarter.

It sounds like it really depends on how much of that $32B in "loss reserves" is for current/past failures and how much is for anticipated failures. If most of it is soaked up in past failures, the new failures will keep lowering the DIF balance.

Also, a nice summary is here.