View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Banking & Finance
AN EIGHTH DISTRICT PERSPECTIVE
SPRING 1988

FDIC Responds to Increasing Bank Failures
Historically, the United States has had few bank failures.
From the early 1940s through the early 1980s, only five or
six banks failed each year. In the mid-1980s, however, bank
failures grew to an unprecedented high. The 203 failed and
assisted banks in 1987 were far more than in any other year
since the Great Depression and compare with 145 in 1986,
120 in 1985, 79 in 1984 and 48 in 1983. This article examines
recent trends in bank failures and discusses ways in which
bank regulators resolve failures.

Recap o f 1987 Failures

Table 1
1987 Bank Failures
Federal Reserve District

Failures

Boston1
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco2
TOTAL

2
1
0
3
0
14
10
2
17
66
55
14
184

Selected
States

Failures

Texas
Oklahoma
Louisiana
Colorado
Minnesota
California
Kansas
Iowa
Nebraska
Missouri
Wyoming

50
31
14
13
10
8
8
6
6
4
4

The Federal Deposit Insurance Corporation (FDIC)
handled 184 bank failures and provided financial assistance
to 19 banks in danger of failing in 1987. These figures
compare with 138 failures and seven assisted banks in 1986.
The FDIC incurred costs of roughly $3.3 billion in 1987 to
pay off insured depositors and to close or merge the failed
institutions.
includes the failure of a stock savings bank in Massachusetts,
Table 1 shows that 1987 commercial bank failures were
includes the failure of an industrial bank in California.
concentrated in the Tenth (Kansas City) and Eleventh
(Dallas) Federal Reserve Districts, where 121, or 66 percent,
assets of $47.1 million or .04 percent of total bank assets
of the 184 bank failures were located. Texas led all states
in the District.
with 50 bank failures, followed by Oklahoma with 31. Many
of these failures, as well as several in Louisiana, can be
attributed to energy-related loan exposure. A scattering of
Purchase and Assumption
bank failures also occurred in other states in 1987: Colorado
Prior to the mid-1980s, most bank failures were handled
recorded 13 bank failures, while Minnesota had 10.
by a process known as a closed bank purchase and
The assets of banks that failed in 1987 totaled $6,937
assumption transaction. Under this method, the FDIC took
billion; the average size failed bank held $37.7 million in
over the bank’s problem loans, replaced them with cash and
assets. The largest commercial bank to fail
put the bank up for sale. These closed bank
in 1987, Capital Bank and Trust Company,
transactions worked until the 1980s when
Baton Rouge, Louisiana, held assets of $384.4
bank failures accelerated, causing the FDIC
million, while the smallest held assets of $3
to take on more and more problem loans. In
million. All but 12 of the 184 banks that foiled
1980, the FDIC had $2 billion in problem
TIIE
in 1987 had assets of less than $100 million.
loans
on its books compared with $11 billion
FEDERAL
K L S lim
O f the 1987 bank failures, two were located
at the end of 1987. As a result of this
BAN K of
within the Eighth Federal Reserve District.
increasing risk exposure, the FDIC is
ST. m i ls
These banks, neither of which was a member
attempting to get out of the problem loan
of the Federal Reserve System, had combined
business. Instead of replacing a failed bank’s



SPRING 1988

FEDERAL RESERVE BANK OF ST. LOUIS

problem loans with cash, the FDIC is marketing the entire
bank as is and giving the new owners cash assistance. This
method is called a whole bank purchase and assumption
transaction.
Whole bank purchase and assumption transactions, which
protect all depositors, are the dominant method used by the
FDIC to handle failed banks. In 1982, the FDIC handled
26 failed banks by purchase and assumption transactions,
while in 1987, 133 of the 184 failures were resolved by this
method. Under this approach, the FDIC notifies bankers
that a bank is for sale. The agency then accepts sealed bids
from interested parties, each bid indicating how much money
is required from the FDIC to take over the bank.

Insured-Deposit Transfers and Payoffs
When there are no buyers interested in acquiring a failed
bank on a merger basis at any price, insured-deposit transfers
and insured-deposit payoffs are last-resort alternatives
employed by bank regulators. Typically, losses in such banks
can not be quantified, sometimes because of the extent of
fraud involved in the failure of the bank. In 1987, 39 of the
184 failed banks were handled as insured-deposit transfers;
while 11 failures were handled as insured-deposit payoffs.
With the insured-deposit transfer, the acquiring bank takes
over the failed institution’s insured deposits. The purchasing
bank acts as an agent for the FDIC, providing the failed
bank’s customers with access to their insured accounts. The
acquiring bank takes on this responsibility in the hopes of
adding the former customers of the failed bank to its own
customer base. Under this method, insured accounts, up to
$100,000, are paid off first. As the FDIC sells off the failed
bank’s assets, it divides the remaining proceeds to the
uninsured account holders.
In some cases, the FDIC cannot interest a solvent bank
in either a purchase and assumption transaction or an
insured-deposit transfer. In these instances, the FDIC will
bolt the bank’s doors and pay off the holders of insureddeposit accounts.

Bridge Bank
A new program employed by the FDIC to handle failures
of larger, more complex banks is the bridge bank program.
Under this method, the FDIC approves the organization of
a new full-service bank to take over the liabilities and assets
of the failed bank until a purchaser can be found. The FDIC
operates the new bank until such a time. The first application
of the bridge bank program occurred last year at Capital Bank
and Trust Company, Baton Rouge, Louisiana. Deposits of
$308.7 million were transferred to the newly created Capital
Bank and Trust Company, which is being run by the FDIC.

Disposition of Failed and Assisted Banks by the
FDIC 1987
Whole bank purchase and assumptions
Insured-deposit transfers
Insured-deposit payoffs
Bridge banks

133
39
11
__ 1_

Failed banks
Open-bank assistance

184
19

TOTAL FAILED AND ASSISTED BANKS

203

Open-Bank Assistance
In addition to handling bank failures, the FDIC handled 19
insolvent banks under the open-bank assistance program in
1987. Eleven of the 19 banks were associated with one banking
system, the BancTEXAS Group. With an open-bank assistance,
the bank does not close and technically “fail” before being
acquired. Instead, a potential buyer can approach the bank
and buy it, with FDIC assistance, before the bank becomes
insolvent.
To date, the most prominent example of open-bank assistance
was the FDIC’s $4.5 billion bail-out of Continental Illinois
Bank of Chicago in 1984. In 1987, the second largest assistance,
First City Bancorporation of Houston, Texas, received
preliminary approval for $970 million in FDIC assistance to
prevent the $12.2 billion holding company with 61 banks from
failing.

Conclusion
A record number of FDIC-insured banks failed in 1987; the
fourth consecutive year. Last year’s 203 failures (184 closed
banks and 19 open-bank assistance transactions) brought to
637 the number of banks that have failed since 1982. From
the inception of the FDIC in 1933 through 1981, a total of
586 insured banks failed.
1988 forecasts call for a continuation of high failure rates.
Currently, there are approximately 1,600 banks on the “problem
bank list,” up 7.8 percent from the 1,484 on the list at the
beginning of 1987. Persistent difficulties in some regional
economies, particularly the Southwest, suggest a near repeat
of the pattern seen in 1987. In fact, by late March of this year,
the FDIC had received their second largest request for financial
assistance since the birth of the agency. First Republicbank
Corporation of Dallas, Texas, with assets of $33.2 billion was
granted a $1 billion loan from the FDIC. Although currently
this is the second largest bailout in the FDIC’s history, it could
become the largest, exceeding that of Continental Illinois of
Chicago.
— Lynn M. Barry

Banking & Finance—An Eighth District Perspective is a quarterly summary of banking & finance conditions in the area served
by the Federal Reserve Bank of St. Louis. Single subscriptions are available free of charge by writing: Research and Public
Information Department, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, Missouri 63166. Views expressed are
not necessarily official positions of the Federal Reserve System.
2



FEDERAL RESERVE BANK OF ST. LOUIS

SPRING 1988

EIGHTH DISTRICT BANKING DATA
LARGE WEEKLY REPORTING BANKS*
1
Rates of Change
Level
1/1988
($ millions)

Current
Year
1/19871/1988

Current
Quarter
IV/19871/1988

Same Periods
Previous Year
IV/19861/19861/1987
1/1987

Selected Assets & Liabilities
$20,343
6,862
4,562
5,727
874
2,317

Total Loans & Leases
Commercial Loans
Consumer Loans
Real Estate Loans
Loans to Financial Institutions
All Other Loans
Total Securities
U.S. Treasury & Agency Securities
Other Securities
Total Deposits
Non-Transaction Balances
MMDAs
$100,000 CDs
Demand Deposits
Other Transaction Balances2

5.9%
15.5
-16.1
14.6
31.2
0.5

6.7%
8.0
-0 .3
22.4
-2 0 .7
-1 .3

13.2%
15.6
17.0
26.4
-1 3 .6
-7 .2

5,085
3,616
1,468

22.8
33.3
1.0

11.8
18.6
-1 .9

24.8
53.4
-1 5 .6

11.7
31.8
- 14.9

23,543
14,976
2,653
5,087
5,920
2,646

6.1
14.0
4.1
20.4
-17.6
28.1

6.3
11.8
-1 2 .0
31.2
-6.1
8.3

3.7
8.5
35.8
12.2
-1 5 .4
39.6

9.1
4.9
23.5
-0 .5
11.4
31.6

11.8%
10.3
18.2
17.0
32.7
-9 .2

EIGHTH DISTRICT INTEREST RATES3
March 1988
NOWs
MMDAs
Time CDS
92 — 182 days
1 — 2Vz years
2 V2 years and over

Feb 1988

Jan 1988

March 1987

5.03%
5.35

5.03%
5.34

5.06%
5.41

5.02%
5.21

6.31
6.90
7.42

6.32
6.91
7.43

6.43
7.00
7.57

5.58
6.25
6.63

All data are not seasonally adjusted.
1 A sample of commercial banks with total assets greater than $750 million. Historical data have been revised to incorporate adjustment factors
that offset the cumulative effects of mergers and other changes involving weekly reporting banks during 1986. These adjustment factors, which are
computed each year, are used to construct a consistent time series for which year-to-year growth rates can be calculated. Adjustment factors are available
upon request from the Statistics Section of the Research and Public Information Department. Rates of change are compounded annual rates.
2 Includes NOW, ATS and accounts permitting telephone or pre-authorized transfers.
3 Average interest rates paid on new deposits by a sample of Eighth District commercial banks.
3




BANK PERFORMANCE RATIOS1
United States

Eighth District
IV / 8 7

IV / 8 6

IV / 8 5

IV / 8 7

IV / 8 6

IV / 8 5

Return on Average Assets

<$100 million
$100 — $300 million
$300 million — $1 billion
>$1 billion

.89%
.95
1.07
.51

.87%
.87
.66
.98

.86%
.96
.52
.87

.53%
.77
.55
-.1 2

.46%
.70
.59
.64

.63%
.84
.76
.66

Return on Average Equity

<$100 million
$100 — $300 million
$300 million — $1 billion
>$1 billion

10.06
11.81
13.68
7.96

10.05
11.14
8.59
14.65

10.00
12.42
6.78
13.47

6.16
9.95
7.87
-2 .4 0

5.47
9.37
8.44
11.15

7.34
11.27
10.21
11.80

55.55
65.54
67.99
81.51

53.57
60.12
67.23
80.21

54.76
63.31
65.60
79.87

58.06
65.06
74.95
86.10

56.69
62.34
71.03
85.86

58.92
64.55
71.58
85.33

2.08
1.93
1.52
2.44

2.54
1.97
2.37
1.82

2.73
1.98
2.58
1.99

2.65
2.20
2.41
3.94

3.12
2.54
2.50
2.78

3.05
2.38
2.26
2.74

1.48
1.33
1.32
2.15

1.44
1.31
1.53
1.39

1.29
1.19
1.38
1.41

1.64
1.50
1.71
3.16

1.60
1.47
1.59
1.67

1.40
1.30
1.37
1.45

.74
.66
.73
.68

1.12
.97
.91
.57

1.26
.71
.81
.59

1.09
.78
.94
.86

1.52
1.01
.96
.82

1.35
.83
.73
.71

Loans as Percent of Deposits

<$100 million
$100 — $300 million
$300 million — $1 billion
>$1 billion
Nonperforming Loans as Percent
of Total Loans2

<$100 million
$100 — $300 million
$300 million — $1 billion
>$1 billion
Loan Loss Reserves as Percent
of Total Loans

<$100 million
$100 — $300 million
$300 million — $1 billion
>$1 billion
Net Loan Losses as Percent
of Total Loans

<$100 million
$100 — $300 million
$300 million — $1 billion
>$1 billion

1 Size ranges based on bank assets.
2 Includes past due greater than 89 days and nonaccrual.





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102