Lax action by regulators led to higher losses for FDIC

When the economy was booming and banks were flourishing, regulators appear to have been asleep at the switch. Unfortunately for U.S. taxpayers, that means that the losses to the FDIC insurance fund are greater. Now, a few years later, with the fund rapidly running out of money, the percentage of failed bank assets that have to be covered seems poised to grow.

The fund now stands at $13 billion, but considering the promises made to BB&T (BBT) after it took over Colonial bank, it seems like the fund could be depleted rapidly. The immediate cost to the fund is $2.8 billion and the FDIC entered into a loss-share agreement on approximately $15 billion of the $22 billion in assets.
For the 102 banks that have collapsed in the last two years, the FDIC estimates that costs averaged 25 percent of assets.That's up from 19 percent between 1989 and 1995, when 747 financial institutions, mostly savings and loans, failed. There are still over 300 banks on the undisclosed FDIC problem list and, as I reported last week, as many as 150 of them face significant losses on bad loans.

Inspectors general at the Treasury Department and the FDIC have issued more than a dozen reports concluding that regulators stood on the sidelines and watched as banks took on rapid and unsteady growth. Regulators should have taken quicker action -- either shutting down banks or putting them on closer supervision -- when they saw institutions taking these risky moves.

One case in which regulators failed to act swiftly was that of Integrity Bank of Alpharetta, GA. According to the FDIC's inspector general, the bank was allowed to continue offering unusually high interest rates to lure more depositors for two years after examiners noted deficiencies in its loan underwriting. The failure of this bank last year cost the FDIC $295 million.

Banks pay extra when they need additional supervision, so they do everything they can to avoid it. My father, who was a savings and loan examiner for the state of New Jersey, often complained about lax supervision by Federal regulators. He would talk about how he wrote up problems with certain financial institutions, only to find that his reports were edited in Washington. Obviously, based on reports from the inspectors general, these shenanigans are still going on.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to the Federal Reserve.
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