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Tightening the Screws: Is the FDIC Putting Off New Charters?

Posted by Wendell Brock on Mon, Jan 19, 2009

2008 was a year most bankers would rather forget. Around the country, twenty-six banks failed, mostly on the tide of rising loan defaults. Seemingly, the FDIC scrambled all year to sell off bank assets and continue to fulfill its promise of deposit insurance. It wouldn’t be unreasonable to think that all of this activity has left a bad taste in regulators’ mouths.

A recent article in American Banker suggests that this ‘bad taste’ has resulted in an unofficial suspension of insurance application approvals for banks in certain states or banks that intend to focus on certain types of lending. The article references the FDIC’s unexpected denial of Perimeter First’s insurance application—the Georgia bank’s business plan emphasizes commercial and industrial lending. The FDIC has denied that any type of moratorium is in place.

Georgia banks face uncertain future

Given the record-poor performance of Georgia banks in 2008, it isn’t too far of a stretch to assume that regulators denied Perimeter First’s application on the basis of industry conditions. Of the twenty-six bank failures last year, nearly 20 percent of them were located in Georgia. According to Atlanta Business Journal, Georgia banks were holding out for a real estate recovery in the first half of 2008. That, of course, didn’t happen, and the consequences were disastrous. All five of Georgia’s bank failures occurred in the second half of the year.

Atlanta Business Journal also estimates that as many as 50 Georgia banks could collapse in 2009, citing rising unemployment and a foreclosure crisis that just won’t quit.

Other states likely to be under scrutiny

The combination of bank failures, rising unemployment and massive foreclosures isn’t exclusive to Georgia. If FDIC is unofficially proceeding with caution with respect to Georgia insurance applications, it’s likely to be doing the same for de novo banks in California, Florida and Nevada—all three states have higher than average unemployment and top-ten foreclosure rates. Here are the stats:

•  California experienced six bank failures in 2008. And, the state’s foreclosure rate, according to RealtyTrac, ranked fourth in the country at 3.97 percent. The golden state’s unemployment rate in November was 8.4 percent, versus a national average of 6.8 percent.

•  Florida had two bank failures last year, to go along with 7.3 percent unemployment in November and a 2008 foreclosure rate of 4.52 percent.

•  Nevada had three bank failures (including WAMU), 8 percent unemployment in November, and a nation-leading 2008 foreclosure rate of 7.29 percent.

Whether FDIC has suspended approval for certain states, or has simply adjusted its standards to fit a new and more difficult environment, the end result is the same: de novo banks will have to be more careful about how they proceed with their organization process. Now, more than ever, it’s crucial to have the right programs, plans, timelines and management teams in place to be successful.

Topics: FDIC, real estate, charters, Georgia banks, California banks, failures

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