The reasoning behind the FDIC’s decision to increase the supervisory period over new banks from three to seven years is faulty to me, although it won’t hurt the banks in general.
What the FDIC drew their conclusion from was data showing that from 2000 to 2007 only 10 percent of new banks failed, while from 2008 till now, they make up 21 percent of the banking failures.
A couple problems with that is the data is far too generalized, as in reality ten of the twenty three new banks failing during that time were in Georgia, which suffered from a huge real estate boom which got hit hard when the recession came. Approximately 20 percent of all bank failures are chartered in Georgia.
You might argue that they didn’t fail then, but they did. It’s just that they had billions upon billions pumped into them to make it look like they didn’t fail, because of the misguided policy that they were too big to fail.
Make no mistake about it, those big banks would have went bankrupt if they hadn’t been bailed out, and just one would have added up to more than all the other banks’ losses combined.
So while the numbers are correct as far as the number of new banks that were failing, it didn’t take into account the actual failures of the huge banks which were artificially propped up.
Adding those two circumstances together make the logic behind the decision faulty, although again, the results will probably be harmless either way.
As far as the new FDIC policy, new banks being insured will have exams on a more frequent basis over a seven year period, and will also be subject to higher capital requirements. And if the banking executives make any changes in their business plans, they must submit it to the FDIC for approval before going forward with them.
- rapid growth
- over-reliance on volatile funding, including brokered deposits
- concentrations without compensatory management controls
- significant deviations from approved business plans
- noncompliance with conditions in the deposit insurance orders
- weak risk management practices
- unseasoned loan portfolios, which masked potential deterioration during an economic downturn
- weak compliance management systems leading to significant consumer protection problems
- involvement in certain third-party relationships with little or no oversight
While this rule has been part of FDIC policy for years, all new banks do have to pay higher assessment for the first five years. That means they have to have higher reserves to protect against difficult times.
Any existing bank under sever years old will be subject to the new rules.
