Stringing out bank closings to buy time

WASHINGTON - The cascade of bank failures this year has surpassed 100, the most in nearly two decades. And the trouble in the banking system from bad loans and the recession goes deeper than the number suggests.

Dozens, perhaps hundreds, of other banks remain open even though they are as weak as many that have been shuttered. Regulators are seizing banks slowly and selectively - partly to avoid inciting panic and partly because buyers for bad banks are hard to find.

Going slow buys time. An economic recovery could save some banks that would otherwise go under. But if the recovery is slow and smaller banks' finances get even worse, it could wind up costing even more.

The bank failures, 106 in all, are the most in any year since 120 collapsed in 1992, at the end of the savings-and-loan crisis.

On Friday, regulators took over Partners Bank and Hillcrest Bank Florida, both in Naples; American United Bank, of Lawrenceville, Ga.; Flagship National Bank, of Bradenton, Fla.; Bank of Elmwood, of Racine, Wis.; Riverview Community Bank, of Otsego, Minn.; and First Dupage Bank, of Westmont, Ill.

When a bank fails, the Federal Deposit Insurance Corp. swoops in. It tries to sell off the bank's assets and cover its liabilities, primarily customer deposits. Its insurance fund covers the rest.

Bank failures have cost the FDIC's fund an estimated $25 billion this year and are expected to cost $100 billion through 2013. To replenish the fund, the agency wants banks to pay in advance $45 billion in premiums that would have been due over the next three years.

The FDIC will not say how deep a hole its deposit insurance fund is in. It can tap a credit line from the Treasury of up to a half-trillion dollars to cover the gap.

The list of banks in trouble is getting longer. At the end of June, the FDIC flagged 416 as being at risk of failure, up from 305 at the end of March and 252 at the start of the year.

Yet the pace of actual bank failures appears to be slowing. The FDIC seized 24 banks in July, 11 in September, and nine in October.

If any bank poses an immediate danger to customers or the broader financial system, regulators close it immediately, bank supervisors said. The issue is murkier for troubled banks that might qualify to close but whose closings might still be postponed or even prevented.

The FDIC's first priority, spokesman Andrew Gray said, is to maintain public confidence in the banking system. "As evidenced by the stability of insured deposits throughout last year, this mission has been a success," he said.

Public confidence is not reason enough to delay a bank closing, Gray said, because legally the decision to close rests with whoever chartered the bank - a state or federal agency.

But more than a dozen experts, including current and former regulators, bankers and lawyers, say the FDIC's mission to maintain public confidence in the banking system contributes to the go-slow approach.

"The FDIC was set up to create confidence and prevent bank runs," said Mark Williams, a former bank examiner for the Federal Reserve. Being too aggressive about bank closings "can be counter to the mission."

Last fall, the financial turmoil was rooted in bad bets that the nation's biggest banks had made on complicated, high-risk mortgage investments.

Smaller banks have been undone by something more conventional - real estate, construction, and industrial loans that have soured as the recession has deepened. Defaults are up as developers abandon failing projects and landlords cannot meet their loan payments.