In what I fear may become a regular feature here, the Federal Deposit Insurance Corporation (FDIC) arranged for the takeover of the 10th failed bank of 2008 on Friday. As I posted, the FDIC likes to close banks on Friday after hours so they can reopen as branches of the acquiring bank on the following Monday morning. According to the Associated Press, the bank in question is real estate lender, Integrity Bank of Alpharetta, GA.
How did Integrity lose its integrity? It was unusual in that it combined real estate and religion. AP reports that Integrity Bank started lending in November 2000 -- "specializ[ing] in real estate lending in the Atlanta area with a self-described 'faith-based culture.'" Integrity Bank "grew into a billion-dollar publicly traded company - but when the real estate market started faltering, the bank struggled."
AP interviewed an FDIC spokesman who said "its aggressive pursuit of construction loans, coupled with falling real estate values and 'inadequate risk management'" caused its failure. According to AP, its "construction loans were 76 percent of the bank's total loan portfolio" and it lost $33.6 million in the second quarter. Sometimes religion and finance don't mix.
Will the FDIC's $45.2 billion DIF be depleted before this run of bank failures is all over? It probably will be unless the FDIC raises its insurance premiums. CNNMoney reports that the FDIC plans to charge riskier banks higher premiums.
So if you have money in a riskier bank -- one that is losing money and charging off large volumes of loans -- get it out before those higher fees get passed on to you. Regardless, we will all pay for Integrity's lack of integrity.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
8-30-2008 @ 12:00PM
Max said...
Why do banks fail? How about some articles about the small community banks that are helping Americans live a better life. Articles about banks that doing just fine, stay away from the large and larger banks, corporations are allowed to get to big and then they are to big to fail and guess bails them out, that's right, the American taxpayer and in the case of financial institutions, other banks.
8-30-2008 @ 8:14PM
william lindblad said...
This should be more in the realm of WHY do banks fail?
In the present scenario it is mostly due to engaging in foolhardy lending practices, BUT is can also happen when all activity is prudent.
Weather events have brought down just as many, in fact they have brought down economies.
In 1816, the world and in 1857, the U.S.
Deja Vu?
Back in Jan. both the tea leaves and the bones indicated a natural event. While I am making a funny and it is really based on historical data, my view is still empirical and we will have to wait until next week or so to find out. If so, expect a lot more than bank failures.