FDIC to Ratchet Up Scrutiny of Newly Chartered Banks
They Are Overrepresented in Failures
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Saturday, August 29, 2009
New banks will face tighter oversight under federal rules announced Friday, as the Federal Deposit Insurance Corp. looks to minimize the potential for payouts to depositors at troubled institutions.
Newly created banks are historically more likely to fail than their more established competitors. So the agency said in a letter Friday that it will now put them under more intensive supervision and capital requirements for their first seven years of operation, instead of the current three years.
"Recent experience demonstrates that newly insured institutions pose an elevated risk to the Deposit Insurance Fund, particularly during an economic downturn," the FDIC said in a letter to banks. Those that have been covered by deposit insurance for less than seven years "are over-represented on the list of institutions that failed during 2008 and 2009, with most of those failures occurring between the fourth and seventh years of operation."
The banks would thus face more frequent examinations -- yearly, instead of every 18 months. And the FDIC will particularly watch for characteristics tied to bank failures in the current downturn, such as rapid growth and heavy reliance on volatile funding sources such as deposits obtained through brokers.
Regulators have seized 84 banks in 2009, including Texas-based Guaranty Financial on Aug. 21 and three small banks in Maryland, Minnesota and California on Friday night. The FDIC said Thursday that 416 institutions, with combined assets of about $300 billion, are on its problem bank list, at risk of failing in the future.
The wave of bank failures has been caused by a deep recession. Many analysts expect further losses as commercial real estate and land development loans go sour in the year ahead.
Those losses have depleted the FDIC's insurance fund, which is used to pay off depositors when an institution goes under. The fund was reduced to $10.4 billion at the end of June, the agency said Thursday, down from $13 billion at the end of March.
The FDIC is also considering ways to raise more money and has announced a special fee assessment on member banks to help replenish the fund. It could do so again by the end of the year.
