Why Is The FDIC Ignoring Problem Banks?

USA Today had a story Tuesday that pointed out how regulators were regularly absent as the banks they were supposed to be overseeing failed under mounting debt.

Bert Ely, a longtime banking consultant, has identified a data point that highlights how far behind the regulators have actually fallen.

During the savings and loans crisis and its aftermath, banks that failed had a loss ratio--or a bank's total losses divided by its total deposits--of just around 13%.

Since the current recession began, that same ratio for failed banks surged to more than 37%, or nearly triple S&L crisis levels.

This means that the regulator responsible for seizing failed banks, the FDIC, is waiting much longer before taking over these doomed banks, allowing their losses to mount.

As a bank's loss ratio increases, it becomes costlier for the bank, and they pass the additional expenses onto their customers. Therefore, the FDIC inaction has resulted in rising costs for regular Americans, Ely said.

"The big question is why is the FDIC moving so slowly? It is very evident from these numbers that there is serious ineptitude among the regulators," Ely said. "Their incompetency is costing the banking industry, but they are passing this cost on to depositors and borrows, so we end up suffering."

As for their part, the FDIC told the Huffington Post last week that the FDIC doesn't make the decision when to seize a bank. The agency said that it merely carries out the seizure, but other regulators are responsible for determining when a bank has failed. A patchwork of agencies currently make this decision.

Hopefully this type of confusion can be streamlined, spurring a quicker response time among regulators, when Obama reveals to Congress tomorrow his plan to overhaul regulatory oversight of Wall Street.

Comments

[nomorefed]

02:28 PM on 06/18/2009

Take back the trillions of $$$ given to the banks, who just sit on it and make it totally ineffective then start government incentive to create realistic industries that give employment and generate real productive income, some of which would hopefully be from exports.

Every other country, especially China and most of Europe have goverment incentives to protect it's industries. No matter what you call it it's a form of protectionism and its inevitable. We should stop being naive and take care of our own house. The only ones who win if we don't are the multinational corporations who don't care where they get their hand out.

recommended reading: http://www.bit.ly/12NCJR

Every other country, especially China and most of Europe have goverment incentives to protect it's industries. No matter what you call it it's a form of protectionism and its inevitable. We should stop being naive and take care of our own house. The only ones who win if we don't are the multinational corporations who don't care where they get their hand out.

[maxmcgloin]

08:28 PM on 06/17/2009

Seems like the same old song. But it is still danceable.

[hearmeout]

07:37 PM on 06/17/2009

They're postponing the inevitable because if they actually shut down all the bad banks then there would be less than half of them remaining and that won't do at all if we're supposed to be pretending that everything is all shiny and rosy, now would it? It's hard to peddle hope when more than half of your banks are insolvent!

[Henry]

09:50 AM on 06/17/2009

Julie,
The 13% to 37% increase in loss to total deposits can be explained. Back in the old days of the savings and loans crises, the lending component of banks was the deposit base. Deposits is all there were except for some fed fund liabilities and/or some equity debentures. But now there is a sea change of difference. For example, a bank can borrow lendable funds from the FHLB and the FHLB takes a first lien of the bank's loans. So...now when a bank fails, the losses are double the size as previously due to the fact that the lendable liabilities have to come out first leaving the losses to be spread over a smaller deposit base compared to earlier decades. This is all sort of like supply side economics, funny money, and flood the banks with money and they're likely to make bad loans. It is a philosophy that has us where we are, Indeed, if the bank loans were solely a funciton of bank deposits we'd not be in this problem.

[jerrypl]

11:32 PM on 06/16/2009

It is not the FDIC's job to baby sit the banks and to tell them that they are close to insolvency. The bank auditors are supposed to do that. The FDIC is to take over once there is a bank failure. They have their hands full as it is. It is the job of the bank's executives, board of directors, auditors, and accountants to determine the survival of their own banks. Once they realize that there is insolvency, the regulators come in to determine if this is so, and then move forward to a take over.

http://eye-on-washington.blogspot.com

[Henry]

09:41 AM on 06/17/2009

jerry,
You have that wrong. It is the chartering authority for the bank that declares death and appoints the FDIC division of liquidation as the receiver. The dept of treasury is the chartering authority for national banks and the separate states are the chartering authority for state banks. The occ (office compt currency) examines national banks. The fed examines fed member banks (chartered by the states) and the fdic examines state chartered banks which do not belong to the fed. Then of course you have savings banks (ots and treasury) and credit uniions.
The bank's execs, board of directors, auditors, and accuntants have no determination in their assessment of solvency. As a matter of fact when declared insolvent the aforemention are reviewed for criminal and civil violations re their entity insolvency. This is the game and how it's currently played.

[rf dude]

11:28 PM on 06/16/2009

I'm investing in

Mervyn's Gift Certificates...
--

[bascombe]

09:19 PM on 06/16/2009

Isn't it obvious that the banks own our government, both parties. the repugnuKKKans are simply more obvious and vocal in their contempt and disdain for the people.

[PlasmaX]

09:00 PM on 06/16/2009

The banks are failing because of over leveraged derivatives backed by plummeting real estate values. The only way out is to adjust the next-to-worthless derivatives and enact meaningful foreclosure reform to slow down the loss of collateral value . Until then....more...and I mean much more of the same bad news. This situation is much like a snake swallowing its own tail.

[grateful4thedead]

10:53 PM on 06/16/2009

plasma...foreclosure reform that slows down the loss of collateral value is exactly what they are trying to do now. in other words, they are trying to reinflate the bubble...it cannot mathematically work.

either people can pay for their home or not. most of these foreclosures as well as those that have refinanced and gone back into default are against folks that simply are in over their head. they should be renting or living with family instead of trying to pay a mortgage with a debt/income ratio of 45% and much higher in many cases.

politicians and wall st types lie...math does not.

[schatsie]

06:30 AM on 06/17/2009

It is not just that, it is the pathetic job market.....

[RumiSouth]

08:36 PM on 06/16/2009

Isn't it also possible that the FDIC has more failing banks than ever before that need to be taken over? Considering that the FDIC has become one of the only outfits actively hiring new people, it makes sense that they were unprepared to deal with so many banks.

[ErnestineBass]

10:15 PM on 06/16/2009

BINGO!

The FDIC is hiring like mad and still can't keep up with the number of bank foreclosures.

[ibsteve2u]

08:30 PM on 06/16/2009

Our regulatory agencies are playing a variation of the game with America that you played with yourself as a kid, when you never looked in the closet late at night because you didn't really want to know what was in there.

They became too adept at staying "on message" under that last Administration, and that last Administration's message was that anything that enriched a specific subset of Americans was O.K.

Now they fear opening the closet door, lest America realize that the monsters in the closet include our regulatory agencies.

[LeeCalif]

08:18 PM on 06/16/2009

This is why.

http://video.google.com/videoplay?docid=7065205277695921912

[in4success]

08:05 PM on 06/16/2009

"Why Is The FDIC Ignoring Problem Banks?"

lemme guess...because the banks are the really big boss...ya know, the fascists the tea-baggers SHOULD have been rallying against.

the bigger question should be: WHY DO WE KEEP PRETENDING?

[grateful4thedead]

07:42 PM on 06/16/2009

Julie said: "Hopefully this type of confusion can be streamlined, spurring a quicker response time among regulators, when Obama reveals to Congress tomorrow his plan to overhaul regulatory oversight of Wall Street."

There is NO confusion, absolutely NO confusion. The various regulators absolutely know which banks are insolvent: they are smarter than the general public gives them credit for, in spite of their lax approach over many years. It is most likely, though never provable until the history books have been written, that they are not being allowed to seize because of orders from way, way up (like, summers, geithner and bernanke) because of the fear of a panic, etc. So much for the notion that the admin wants transparency and doesn't need to "dumb down" things for americans. not political here in terms of Obama, cuz the Bushies were absolutely asleep at the wheel and in my view they deserve the majority of the blame for our current mess.

actually, if any regulator has talked tough it has been Ms. Bair. the problem is that she is NOT the decision maker and if you read and talk to enough of the right people or sources, she is pretty much given lip service by the aforementioned gentlemen.

like those who have said in this post as well as many others, it will get really, really ugly....just a question of when, sad to say, but the math of the matter is undeniable.

[thnk4selfagain]

07:51 PM on 06/16/2009

"if any regulator has talked tough it has been Ms. Bair."

Agreed, as far as it goes. She warned of the subprime crisis. Geithner recently tried to have her fired, just as these guys went after Brooksley Born in 1998. Incidentally, Elizabeth Warren has been a target of the same "club."

[rugbymom]

09:17 PM on 06/16/2009

But of course we can't accuse white men of being biased, so it must just be accidental that all three of the people they are trying to get rid of (for telling the truth) are women. And when they can't get rid of them, they just ignore them. An old story, and we are all worse off for belittling these wise voices.

[thnk4selfagain]

07:24 PM on 06/16/2009

Why FDIC waiting to long to seize, costing customers more directlly? Maybe FDIC itself is having problems with cashflow. The banksters loses have overwhelmed the agency. In addition, the FDIC's particiation in the PPIP and the aquisition of all those toxic assets (its about to create a market for them this summer), has bogged it down. I *hope* that it is not deliberate to pass what is the bank industry's responsibility on to, who else, the citizens.

The response to this economic/financial crisis has been inadequate and ad hoc. FDIC not functioning as well as it should is another example of it.

[KeysDan]

07:17 PM on 06/16/2009

Because that would mean almost all of the nation's banks.