Bank Failures Rise but Critics Say Not Fast Enough

A Carson City sheriff's detective locked up First National Bank of Nevada in July. Regulators closed it while it still had sufficient capital reserves.
A Carson City sheriff's detective locked up First National Bank of Nevada in July. Regulators closed it while it still had sufficient capital reserves. (By Brad Horn -- Nevada Appeal Via Associated Press)
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By Binyamin Appelbaum
Washington Post Staff Writer
Wednesday, August 13, 2008

First the borrowers. Now the banks.

Federal and state regulators have closed eight banks this year, four since the start of July, as rising borrower defaults on residential and commercial real estate loans start to push some lenders into default, too.

There were no bank failures in 2005 or 2006 and only three in 2007. Now, some analysts expect a few hundred banks to fail over the next several years -- the most since the savings-and-loan crisis two decades ago.

And some critics say the failures aren't happening fast enough. They say regulators are keeping some troubled banks on life support by allowing them to spend money to stay in business that should be reserved to cover loan losses after the bank has failed.

"They are dragging their feet in forcing these banks to reserve realistically," said Bert Ely of Ely & Co., a bank consulting firm in Alexandria. "Some of these banks could have been closed two or three quarters earlier."

So far, the banking industry is facing the kind of plague that mostly claims the young and the weak, analysts say. The vast majority of the nation's banks are in stable financial condition. The failed banks, and those in danger of failing, tend to be smaller institutions burned by overexuberant real estate lending.

But as with the impact of foreclosures, the fallout from a relatively small number of failures may end up raising the cost of banking for everyone. One likely consequence is an increase in the insurance premium that banks must pay the Federal Deposit Insurance Corp. to guarantee customer deposits, which now averages 5.4 cents on every $100 of deposits.

James Chessen, chief economist at the American Bankers Association, said banks would "do what's required to ensure the health of the FDIC." But because the premiums are paid with money otherwise available for lending, Chessen said each one-cent rate increase would reduce the collective lending capacity of U.S. banks by about $5 billion.

The banks and their borrowers will thus be paying for the sins of the failed institutions. That has added urgency to the question of whether regulators are doing everything possible to limit the cost of the failures.

Some of the recent failures were of banks regulated by the Office of the Comptroller of the Currency, one of several agencies that oversee the country's financial institutions. Robert Garsson, deputy comptroller for public affairs at the OCC, said that when a bank is losing money, regulators must balance its chance of recovery against the cost of continued losses.

"We save a lot of banks by being able to work with them, avoiding failures that would be costly to the insurance fund," Garsson said. "The only ones that people see are the ones that fail."

He noted that the OCC closed the First National Bank of Nevada in July while it still had significant capital reserves, well above the level at which regulators are required to take action, because it concluded the bank could not be saved.

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