• News Ticker alerts

House Resolution 2056, signed into law by President Obama on Tuesday, directs the Federal Deposit Insurance Corporation (FDIC) and the Government Accountability Office to study the effects of bank failures on the economy.

Particularly of interest to inspectors is the nature of “loss share agreements.” In these, the FDIC hands over control of one bank that they’ve ordered to close to another bank that they deem healthier and more able to ensure successful operation. The FDIC also promises to cover a portion of losses incurred by the acquiring bank due to its assumed operation of the shuttered one, which could leave citizens (who fund the FDIC insurance fund through reduced returns on their savings accounts) paying up to 95% of the tab once a predetermined cap is reached.

The FDIC Inspector General will look at these agreements to determine whether it would be more likely that banks would offer modifications to struggling customers if they weren’t in place. Under a modification, a borrower’s interest rate and payments are reduced to an affordable level in an attempt by the lender to avoid foreclosures and limit losses. Loss sharing may create a perverse incentive whereby the most efficient course of action would be to deny borrowers modifications and more vigorously pursue foreclosures, passing a bulk of the expenses on to the FDIC.

Another segment of the Inspector General’s assignment is to review the practices of field inspectors, who appraise prospective losses at banks potentially eyed for closure and determine the adequacy of capital levels banks are required to keep available.

The Government Accountability Office will focus on states with 10 or more bank failures since 2008, determining causes for high levels of failure and examining the impact of existing accounting standards. California has had 39 banks shuttered during that time, ranking the state near the top of the list of total failures, though far behind Georgia at 78. Four were local to San Diego – 1st Pacific Bank of California, La Jolla Bank, Imperial Capital Bank, and San Diego National Bank.

  • News Ticker alerts


Sign in to comment

Win a $25 Gift Card to
The Broken Yolk Cafe

Join our newsletter list

Each newsletter subscription means another chance to win!