How To Shut Down A (Small) Bank

The FT magazine has an illuminating article on how the FDIC can efficiently close a failing bank: you can read it here.

15 thoughts on “How To Shut Down A (Small) Bank”

  1. I realy like the ‘hesit style’ narrative. From the article I see a $250k deposit guarantee, similar to our longstanding deposit guarantee (€100k).

    Aside from small retail deposits, what is the funding profile of foreclosed banks…is there any data on who takes the hit ? Also is there a higher risk premium on senior funding for these small banks ?

  2. @ DB,
    usually not. US regional and community banks are deposit funded. There may be some sub debt but that is zeroed along with the equity.

  3. Reminds me of that old joke.

    Q: How do you buy a small bank in Ireland?

    A: Buy a big one and wait.

  4. @Tullmcadoo

    Would agree that it makes sense to wipe out equity and sub debt…but no senior debt implies the only funders who get burnt, are those with deposits of over $250k…and I doubt there are many of them in such banks.

    Thus overall the salient diffference between US Savings & Loans type banks, and say the Irish banks, is the lack of senior funding. I’d be interested in seeing resolution examples where seniors got burned.

    Also in general I wonder is there more flow of inter bank money/senior debt in the EMU than say the US.

  5. Erm, not just small banks. Washington Mutual had 170 bn+ in liabilities. http://www.fdic.gov/bank/individual/failed/wamu.html

    It was much like the large Irish banks – a large general bank, but not systemic. It’s disappearance didn’t so much as a ripple.

    Note, though, that bond debt, where it exists, is subordinate to depositors in the US (so I believe from the ranking of creditors that the FDIC uses).

  6. @ All

    The attached link to an interview with the governor of the Bank de France will be of interest in the context of this thread; and the most recent one on Sinn. (Google Translate does a very good job apart from translating M. Noyer as Mr. Walnut).

    http://www.lefigaro.fr/conjoncture/2011/07/01/04016-20110701ARTFIG00604-la-reponse-de-noyer-aux-eurosceptiques.php

    M. Noyer’s acceptance of the fact that a first and second division banking structure has unwittingly come into existence in the EZ may be noted as also his view that a federal banking resolution structure is now required.

    Unfortunately, Europe does not have a Roosevelt.

  7. @H & DB
    Thur far in the crises, hundreds of big and small banks in the US have been moved along to other intitutions woth liabilities being burned as appropriate/neccessary. (Although was there a wrinkle with WM).

    However, the same regime does not apply in the EZ. I am not aware of any nationalisation or forced sale (such as Fortis to BNP) resulting in any haircut of senior unsecured.

    The reason is probably down to the relative importance of the funding. The US system has less reliance on wholesale funding and where makets froze the FED supplied massive injections of liquidity. EZ banks are massively dependent on wholesale funding so clearly the ECB does not want to frighten the horses. It would rather join hands and pretend there is not a problem.

  8. @Philip Lane / Des Brennan

    An interesting artcicle on how the US handles banks but what is the legal situation in the Ireland and Europe generally?

    I would welcome an article on depositor ranking status in Ireland and Europe and on Special Resolution Schemes in western economies.

    I suspect the comment by Des Brennan is not entirely correct or needs clarification in that the FDIC €250K will come from within the structure of the bank that has been taken over, albeit that the money will be recovered through FDIC, whereas the Irish guarantee of €100K would come directly from the government and altogether seperate from the distribution of the remaining assets of any insolvent bank.

    But I am not at all clear on this area.

  9. How to shut down two large banks? just run them like the Irish banks have been run.

  10. @ Tull, Hoggie, Desmond et al

    the WAMU situation also highlighted the differences in the corporate structure of US banks – holding companies and operational bank companies. In the WAMU case, there was the bizarre situation where WAMU senior debt and equity (Holding Corp) got burnt, but depositors and subbies (Operating Corp) were made whole via the FDIC takeover. A lot of big banks and hedge funds actually got caught out on the sub vs senior difference on that one.

  11. @ Tull

    Why are Euro banks so dependent on wholesale funding? Has it always been thus or did they just get far too big for their deposit bases (or “become detached from their fundamentals” as the FT said beautifully recently about silver) during the Greenspan era ?

  12. @Seafoid,

    “detached from reality” about sums it up. Unlike the US though, they cannot sell their mortgages to the likes of FNMA so they had to hold them on balance sheet and fund them in the wholesale market. For many of them, this is no longer an option. Ergo, no new lending and a desire to sell off of previous years lending.

  13. @all
    thanks for info re US, I’m not familiar with there. Also, just musing…the US crisis is often said to have been caused by MBS type instruments…and that with the debt disintermediaried so much from source, that opacity and undue risk taking emerged.

    I’m thinking such is not so different from Ireland’s reliance on wholesale funding, indeed some banks used ‘on balance sheet’ ACS type instruments to secure funding.

    Though ‘general purpose’ senior debt, is an even worse instrument than on balance sheet MBS….as at least when securitized, some extra information is made available to funders. Paradoxically…I think more ACS type ventures (properly done), would have been better.

    What is very clear is that with what happened, wholesale funders didn’t quite know what they were buying into in Ireland.

    I’d be very interested to see any cases in the US, where in an economic region, a massive increase in money supply was caused by an influx of wholesale funding

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