Bank Failures Rise but Critics Say Not Fast Enough

Still, critics say the handling of some recent failures resulted in unnecessary expenses for the FDIC's insurance fund. The question turns on a requirement that banks set aside money to cover possible losses on loans that seem likely to fail. Banks sometimes push to limit the loans classified as problematic, allowing them to keep more money for other purposes. Some critics say regulators have not pushed back hard enough. As a result, failing banks stay in business longer, sometimes compounding their losses and leaving less money to eventually cover those losses.

"In some of these cases, I believe regulators should act sooner than later to prevent future losses to the fund," said Ken Thomas, a lecturer in finance at the Wharton School at the University of Pennsylvania.

The issue may be headed to Capitol Hill, where the Senate Banking Committee plans to hold hearings on bank failures in September with a particular focus on the July collapse of mortgage lending giant IndyMac Bancorp. Sen. Charles E. Schumer (D-N.Y.) has charged that regulatory lapses led to the thrift's spectacular collapse. Regulators say the thrift failed because Schumer scared customers into withdrawing deposits.

During the real estate boom, it was nearly impossible to crash a bank. Loan defaults hit historic lows as borrowers who fell behind on payments simply refinanced. Banks that needed more money found investors eager to buy a piece of a very profitable industry. The absence of bank failures from June 2004 to February 2007 was the longest placid stretch since the 1920s.

Now, however, borrowers who fall behind are increasingly defaulting on their loans, and banks are struggling to survive the resulting revenue shortfalls. When a bank's reserves run out, regulators step in. The branches and the deposits are then sold to another, healthier institution.

This year's first failure came in January, when regulators closed a small bank that served the black community in Kansas City, Mo. There was another failure in March, then two in May. Then, on July 11, came the collapse of IndyMac, an institution larger than the total size of every bank that had failed in the previous 15 years. Three more failures have followed.

There are some common themes, analysts say. The banks paid high interest rates, attracting deposits from around the country to fuel rapid expansion. They focused on commercial or residential real estate lending. And they started lending in unfamiliar places.

ANB Financial, which was closed by regulators in May, was based in Bentonville, Ark. But almost 90 percent of its deposits came from far-flung investors attracted by the bank's high interest rates. And many of its loans were made from offices in St. George, Utah; Jackson, Wyo.; and Idaho Falls, Idaho.

"Ask yourself, 'Why would a borrower be interested in a lender that's three states away?' It's probably because they're having difficulty getting loans from banks that really know that community," said Chessen, commenting on the general pattern but not on ANB specifically.

The pace of failures will probably increase, particularly if the economy remains weak.

Federal regulators listed 90 institutions as troubled at the end of March, about 1 percent of U.S. banks and thrifts. The list is expected to grow when it is updated at the end of August. Historically, regulators end up closing about 13 percent of the institutions.

Some analysts say that regulators are understating the problem. Gerard Cassidy, an analyst with RBC Capital Markets, estimated in July that more than 300 banks could fail over the next three years.