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Fighting for Equality and Survival

By: Bill Poquette

Bank failures — mostly community banks — totaled 157 during 2010. While that number is less than early estimates of 200 closures for the year, indications are the beat will go on through 2011, because the number of banks on the FDIC’s problem list rose to 860 in the 2010 third quarter from 829 in the second quarter.

Must the carnage continue among banks termed by some “too small to save” and obviously considered so by regulators? Not everyone thinks so.

Ken Guenther, former president and CEO of the Independent Community Bankers of America, suggested in a blog last fall that a time-out be called during which no additional banks would fail and instead regulators would spend time “looking towards saving jobs, spurring lending and containing the growth of too big to fail.”

Research compiled by the ICBA from FDIC data and provided to BankNews by former ICBA Chairman Bill McQuillan suggests that a relatively modest amount of government aid would be a huge help in getting to Guenther’s goal. As of the 2010 second quarter, the ICBA found, a total of $15 billion would have brought the nearly 4,600 institutions with assets of less than $10 billion and with core capital ratios below 10 percent up to the 10 percent level. By contrast, according to the ICBA, estimated losses to the FDIC’s Deposit Insurance Fund were $17 billion for banks under $1 billion that failed from 2008 through three quarters of 2010.

“The whole issue,” says McQuillan, president and CEO of CNB Community Bank in Greeley, Neb., “is that Bank of America or other large banks can call the White House or the Treasury Department and get $30 billion overnight. Small banks call and there is nobody on the other end. Or they call back and say, ‘Sorry, we can’t help you because we don’t think your bank is going to make it.’”

Jerry Swords, president of the Kansas City-based consulting firm Swords Associates Inc., thinks the FDIC should bring back the open-bank assistance that saved some community banks in the 1980s. The way the program worked, according to Swords, a former examiner and vice president of the Federal Reserve Bank of Kansas City, is the FDIC took over a portion of a troubled bank’s portfolio and bought some of the stock the bank issued to replenish its capital. The bank had three years to collect on the bad loans and paid the FDIC a dividend on its investment in the meantime.

Most famously, open-bank assistance was used in 1984 to rescue the former Continental Illinois National, which was considered too big to fail. In that case, the FDIC replaced senior management, purchased $4.5 billion in problem loans for $3.5 billion and injected $1 billion in capital. In exchange, the regulator received the right to purchase 80 percent ownership in the parent company, Continental Illinois Corp.

What Guenther, McQuillan and Swords seem to be saying is this: A policy is needed that tries as hard to save troubled community banks as it does to rescue allegedly too-big-to-fail banks. Indeed, it’s time for Congress and the regulators to come to their senses and abolish this double standard. On their priority lists, the survival of Main Street banks and businesses should rank right up there with saving Wall Street and General Motors.

Bill Poquette is editor-in-chief of BankNews.

Copyright © January 2011 BankNews Media