Financial Regulatory Forum

U.S. FDIC will keep new banks on short leash

By Reuters Staff
August 28, 2009

WASHINGTON, Aug 28 (Reuters) – U.S. bank regulators said on Friday that they are extending the amount of time they keep new banks under strict supervision, saying recent bank failures have indicated that new institutions pose an elevated risk to the insurance fund that safeguards bank deposits.

The Federal Deposit Insurance Corp said it is extending its heightened supervision period to seven years, from three years. During this time, new banks — known as “de novo” banks — are subject to higher capital requirements and more frequent exams.

“Recent experience demonstrates that newly insured institutions pose an elevated risk to the Deposit Insurance Fund, particularly during an economic downturn,” the FDIC said in a letter it sent on Friday to banks.

The FDIC has shuttered 81 banks so far this year, compared with 25 last year, and three in 2007. The banking industry has faced increased pressure from deteriorating home loans, risky commercial real estate loans and losses from credit cards.

The industry reported on Thursday that it lost $3.7 billion in the second quarter of this year.

The increased number of failures has been draining the FDIC’s insurance fund, which stood at $10.4 billion at the end of the second quarter, compared with $45.3 billion a year ago.

“Depository institutions insured less than seven years are over represented on the list of institutions that failed during 2008 and 2009, with most of those failures occurring between the fourth and seventh years of operation,” the FDIC said in the letter.

The agency said a number of banks that recently received deposit insurance have engaged in risky activities in their first seven years of operation to stay afloat. Those activities include rapid growth, over-reliance on volatile funding such as brokered deposits, weak risk management practices, and outside partnerships that have little oversight.

The FDIC provides deposit insurance for roughly 8,100 banks, and safeguards up to $250,000 per account.

(Reporting by Karey Wutkowski; Editing by Steve Orlofsky)

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