Chicago Fed failed to curb speculative loans

By Bloomberg News
Wednesday, May 5, 2010; A17

The Federal Reserve Bank of Chicago failed to halt speculative real estate lending that led to losses at banks in Indiana and Michigan that were later closed, the central bank's inspector general said.

Columbus, Ind.-based Irwin Union Bank and Trust almost tripled in size from 2000 to 2005 as it extended credit to subprime mortgage borrowers with insufficient collateral, Fed Inspector General Elizabeth Coleman said in a report. Chicago Fed supervisors missed "multiple opportunities between 2002 and 2009 to take additional and stronger supervisory actions," the report said.

At Warren, Mich.-based Warren Bank, early supervisory action by the Chicago Fed could have reduced the cost of the ultimate failure, blamed on excessive concentration in commercial real estate, Coleman said in a separate report. Both banks were closed last year.

The findings, dated April 29 and posted on the Fed's Web site, follow similar criticism last year of supervisory flaws at the Atlanta Fed. The chairman of the Senate banking committee, Christopher J. Dodd (D-Conn.), is leading an effort to scale back the Fed's supervisory powers, saying the central bank failed to curtail risky lending practices that contributed to the collapse of the housing market. The measure is part of a proposed overhaul of financial regulation under debate in the Senate.

Reports by the inspector general last year criticized the Atlanta Fed's supervision of Riverside Bank of the Gulf Coast in Cape Coral, Fla., and First Georgia Community Bank in Jackson, Ga.

Fed governor Daniel K. Tarullo is leading an overhaul of examinations by the central bank, aiming to identify potential threats across the banking industry. While supervising commercial banks, Fed district banks process checks and report on regional business conditions.

Irwin Union Bank's failure resulted in an estimated loss to the FDIC's deposit insurance fund of $552.4 million, or 20.5 percent of the bank's $2.7 billion in total assets. Warren Bank's failure resulted in an estimated loss to the FDIC of $276.3 million, or 52 percent of the bank's total assets of $530.9 million.

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