FDIC maintains “don’t ask, don’t tell” stance when it comes to failing banks

by Ryan Caione, August 6th, 2008, 7:00 am

We all know that 2008 has been a tough year for banks. But forget the heavy real estate- and mortgage-related losses endured by the big boys; entire institutions are going under. Eight have failed so far this year, and four have been taken over by the FDIC in the last month alone. By comparison, only three banks failed in all of 2007, and none did in 2005 or 2006.

The latest was small Florida-based First Priority Bank, which fell into receivership on Friday. Superregional SunTrust Banks assumed control of First Priority’s six branches and some $200 million in customer deposits. The week before, California’s First Heritage Bank and First National Bank of Nevada were closed by the Office of the Comptroller of the Currency, and Mutual of Omaha took over the banks’ deposits. The most spectacular collapse this year, of course, was IndyMac Bancorp, which was seized by the FDIC on July 11 and filed for Chapter 7 bankruptcy on Friday. It is the third-largest bank failure in US history.

So what happens when the FDIC steps in? It usually does so on a Friday, so it can take care of business over the weekend, and gives no advance notice, as to not incite panic and a run on the bank. Customers with FDIC-insured deposits (up to $100,000) usually can access their accounts as normal (by check, ATM or debit card, or online), or at a branch when the bank reopens on the following Monday, either under FDIC supervision or by an acquiring bank.

We surely have not seen the last of the bank failures. Indeed, the man who some think shoulders some of the blame for the current mess says there are more to come. The FDIC maintains a watch list of around 90 banks that it deems “troubled”. It doesn’t share its list with the public, for obvious reasons, though some analysts have their own opinions about which banks may be included. Most are small institutions, similar in scale to First Priority.

Of course, with everyone so skittish, naming names can get one in trouble too. Ladenburg Thalmann financial services analyst Richard X. “Dick” Bove was sued by BankAtlantic for suggesting that the bank and its parent company BFC Financial could be next to go under.