FDIC Launches 50 Criminal Investigations Into Failed Banks


In the wake of hundreds of failed banks since the 2008 financial crisis, U.S. regulators reportedly have begun 50 investigations into possible wrongdoing by bank executives, directors and employees.

The Federal Deposit Insurance Corp. (FDIC) is looking into 300 failures of banks of all sizes in cities across the U.S., The Wall Street Journal reported late Tuesday. The agency is also stepping up efforts to punish alleged fraud at failed lenders, the newspaper reported, citing an interview with FDIC Deputy Inspector General Fred W. Gibson.

Gibson, whose agency works with the Federal Bureau of Investigation to examine crimes at financial institutions, declined to identify any of the people or the banks being probed. "We anticipate results from our investigations, although we cannot predict when a particular case will reach a stage at which disclosure of specifics would be appropriate," Gibson told the Journal.

Bank customers will be unaffected by the investigations for the most part, although higher banking costs could eventually hurt consumers. Depositors at failed banks will still be eligible for FDIC payments, even in cases in which banks have engaged in criminal activities.

Hundreds of Bank Failures So Far

Since the start of 2008, more than 300 banks and savings institutions have failed but there have been few criminal charges filed against banking officials. This year alone, more than 140 banks have failed, limiting the economy's ability to recover by further limiting the availability of loans to consumers and small businesses already pinched by tighter lending standards.

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Regulators are responding to growing pressure to identify and prosecute wrongdoers for contributing to the highest number of bank failures in 20 years. The last such crisis, the Savings & Loan crisis of the 1980s and 1990s, resulted in the prosecution of some 1,850 bank insiders, the Journal noted. More than 1,000 officers, directors and other officials went to prison, and federal agencies collected $4.5 billion in professional liability claims.

In the current crisis, no high-profile banker has been charged with criminal conduct related to the failure of a bank or savings institution, the Journal noted. The FDIC is also boosting efforts to use civil lawsuits to hold former bank officials accountable for failed banks.

The probes into conduct of bank employees will likely take months and scrutiny into bank failures is anticipated to continue for years.

Consumers May See Indirect Costs

Deposits at healthy banks won't be affected by the actions, as the probes are into those institutions that have already failed. Further, FDIC officials expect the wave of failures to peak this year.

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The potential cost to taxpayers isn't easy to quantify. The FDIC doesn't receive tax dollars; the costs associated with taking over failed banks is funded by premiums paid by financial institutions for insurance coverage on deposits.

Bank customers may be affected indirectly, says Greg McBride, senior financial analyst at Bankrate.com, "since higher bank costs get passed along to consumers through higher fees and less favorable rates." Private insurers who provide professional liability insurance, which protects finance professionals against potential negligence claims, may also find themselves on the hook.

FDIC's board has authorized the filing of lawsuits seeking to recover more than $2 billion from more than 80 officers and directors of failed banks, the Journal reported. The total is up from about 50 approved suits as of last month, seeking more than $1 billion.