FDIC spokesman David Barr talked with Bankrate recently about the increasing number of bank failures and the effect on the agency. In an effort to help readers better understand how the agency handles bank failures, we are publishing part of the interview. It has been edited for clarity. And for an updated list of bank failures this year, see Here is an updated “2009 list of failed banks.” Find more FDIC news to use in this Special section.
Questions for David Barr:
Some industry analysts are predicting more than 200 bank failures in 2009. Does that seem like a reasonable number?
Predicting failures from the outside is a difficult thing to do. Last year we had 25 failures. To go back to when we had more than 25 failures in a given year you’d have to go to 1993, when we had 50. In 1992, we had 181.
An interesting thing about 1992, and again, predicting bank failures from the outside, if you go back to September or so of 1992 and you did a search for “the December surprise,” you’d find a report that outlined that the government was purposely not closing banks until after the November election. And that once the election occurred, you’d see this avalanche of bank failures. They never materialized.
It’s difficult to make predictions. You get people who use analytical models without actually being on site at a bank trying to figure out what’s going on and trying to make a prediction is difficult at best.
To date, the bank failures that have occurred this year have cost the Deposit Insurance Fund approximately $1,770,000,000. In all but one case, there was an acquiring bank assuming most of the deposits and a good portion of the assets. Why is it that costs to the DIF seem so high?
It could be that the assets that are left have no real value. Even if they take all the good assets, the bad assets could be so bad that there’s no value. You also have administrative expenses for the receivership, and there could be other costs, such as secured borrowings that have to be paid off right away. There are a lot of things beyond the press release that go into calculating the cost to the insurance fund.
In almost all cases it seems that the acquirer does not take the brokered deposits. Does that mean that customers who have brokered deposits, such as CDs, with failed banks have to wait a considerable amount of time to get their money?
The FDIC has to wait to obtain documentation from the brokers. Brokers have become much better at turning around their documents. What took a long time in the beginning, say a year ago, when we started having an increase in failures, was that brokers weren’t getting their documents to us in time. It would sometimes take two to three months to get the necessary documentation from the brokers.
Even though on the night of the failure we were sending notification to the deposit brokers that the bank had failed and (were) asking them to please submit documentation so we could process the claim. It was still taking them a tremendous length of time to do that. Now that we’ve had failures, brokers are used to it and they’re tired of hearing customers clamor for their money.
Once we pay off the broker, they no longer earn interest. So what does the broker do? The broker either has to stop paying their clients interest, or the broker has to eat it and pay their clients the interest that they deserve. So they either have very angry clients or it’s costing them a lot of money. So brokers have finally seen the light, and they’re turning around their documentation much quicker than they had in the past.
What prompts you to give an acquiring bank a discount on some assets?
It depends on how the bid is submitted. Obviously, we’d like to get premiums. The trade-off of selling more assets is beneficial not only to the FDIC but also to the borrowers of the failed bank because it’s going to keep the borrowers in a banking relationship. It’s beneficial to the FDIC because we don’t have to bear the administrative costs of servicing those loans, selling the loans and working with delinquent borrowers.
There is a cost associated with not only holding those loans but then selling them essentially out of liquidation prices. For people to take on the cost associated with servicing assets and dealing with troubled borrowers, we realize there’s a cost there.
The negative bid is still beneficial dollar-wise to the FDIC because we have to take a look and enter into a transaction that’s considered the least costly to us. That analysis is what would it cost to completely liquidate this bank, have no buyer, issue checks to depositors for their insured money, retain all the assets and then eventually sell those assets. We determine what that cost is and if anything beats that cost then we’ll enter that transaction.
So even when you see a negative bid, if it beats our cost of liquidation, we’re going to enter into it. But if there are other bids received and they have a smaller discount or even fall into the premium side, then that person offering the deeper discount isn’t going to end up with the failing bank. There’s a lot that goes into it but it is all bottom line driven. What is going to be the least cost to the insurance fund?
So far, only one bank hasn’t been acquired.
That bank had nothing but ADC loans — acquisition, development and construction loans — which are the hardest loans to sell, and ones where we are seeing the steepest losses. More than 99 percent of the deposits were in the form of brokered deposits. There was absolutely zero franchise value, zero customer base and zero in the way of assets.
It’s a good example of why, for the most part, we’re having success finding people to step forward and take over failing banks from us. It’s the power of a receivership. With a receivership, certain things are known. If you want to enter a new market or increase your market share, you have basically two alternatives — do it on your own or buy a failing institution from the FDIC. If you do it on your own and you merge with another bank, you take on all of that bank’s problems — problem loans, contingent liabilities, potential lawsuits, all the bills, subordinated debt — everything.
(But) if you buy it from the FDIC through a failed-bank basis, the receivership is like a cleansing process. All the problems that caused that bank to fail can be left behind with the receiver. All the contingent liabilities, all the potential lawsuits, left behind. You essentially are assuming a clean bank.
Or if you do what we’ve been doing with some other institutions — even if you take on all the assets — the ability through the receivership to wrap certain assets in a loss-share agreement and to actually know what your ultimate loss of those assets will be — it’s essentially a guarantee that your loss will be X amount at the outside on this failed bank’s assets. That’s a guarantee you can’t get if you’re buying a bank on your own.
Is the FDIC in danger of running out of money?
We feel that we have adequate resources both human and monetary to handle the failures out there. At the beginning of this year, for the first quarter of 2009, the FDIC increased the amount banks pay for deposit insurance. We increased the rate again for the second quarter, and we imposed a one-time special assessment on banks. So with the special assessment and the premium structure that the board has approved, we anticipate bringing $27 billion into the insurance fund this year.
At the end of 2008, the insurance fund stood at just about $19 billion. So that’s a tremendous amount of resources. Yes, the fund did decrease from about $36 billion down to about $19 billion from the third quarter to the end of the year, but that not only takes into consideration the cost of the bank failures in 2008 but every quarter the FDIC places money aside for future failures.
We look at the landscape and try to predict in the foreseeable future the amount of bank failures coming down the pike and what it will cost us, and we set aside money for future losses before banks even fail. So just because the amount of the insurance fund decreases, doesn’t mean that that cash is gone. If those bank failures never materialize, that money gets taken out of reserve and put back into the insurance fund. It’s like banks set aside reserves for bad loans. If they experience those losses, they’ve got that reserve. If they never experience those losses, they can begin to take that money out.
If losses continue, the board can increase the amount banks pay and we can impose special assessments on the industry. Our chairman and our board have indicated that they feel that the banks have the capacity to absorb higher premiums. It’s extremely important for the banking industry to take on the losses of bank failures as opposed to turning to taxpayers for money.
The FDIC has a $30 billion line of credit from Treasury, but at this point we don’t see the need to tap that credit yet. We like to use that as a line of last resort. Whenever you start taking taxpayer money — banks right now are not taxpayer funded and once you start taking taxpayer money, banks open themselves up to a lot more scrutiny because now they’re dealing with taxpayer money as opposed to their own money.