US FDIC (Federal Deposit Insurance Corp.) announced last week that because of the large amount of bad debts related to housing loans, The Columbian Bank and Trust Company was ordered to close down. This is the 9th US local bank to close this year. Analyst points out that the sub-prime crisis impact to the American banking industry is still far from over. More banks are expected to end up with the same fate.
Sub-Prime Crisis Impact May Be Around For A Long Time
According to the FDIC statements, The Columbian Bank and Trust Company, located in Topeka Kansas, had $752 million of assets and $622 million of deposits as of June 30.
The insured deposits of the failed bank, which had nine branches, were sold to Citizens Bank and Trust. Also, Citizens Bank and Trust agreed to buy $85.5 million of Columbian Bank and Trust's assets.
The FDIC said Citizens Bank and Trust did not purchase about $268 million of brokered deposits at the failed bank. The failed bank had approximately $46 million in uninsured deposits held in approximately 610 accounts that potentially exceed the insurance limits. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers, regulators said.
The nine branches of The Columbian Bank and Trust Company will reopen on Monday, 25 August as branches of Citizens Bank and Trust, the FDIC said. Depositors of the failed bank will automatically become depositors of Citizens Bank and Trust. Deposits will continue to be insured by the FDIC.
Once that news is announced, the US market plunged with the DJIA giving up 241.81 points, a more than 2% decline.
Prior to the failing of The Columbian Bank and Trust Company, Douglass National Bank and 8 other US banks went under. Analysts says that it is due to the fact that those banks are in the center of the sub-prime crisis and a direct impact from the high default rate in mortgage loans which causes the above mentioned banks to go under.
Figures are also showing that more American banks may be closing down. In the 9 cases this year, 5 happened within a month around 11 July. Analysts warn that the sub-prime crisis could carry on for about 8 to 12 months. The impact to the American banking industry has not reach the worst yet. So, it is predicted that later this year, we may see some larger investment or commercial banks go under.
Facing such a possible situation, the 2 big US banking supervisory body, the FED and OCC (Office of the Comptroller of the Currency, Administrator of National Banks) has strengthen preventive measures to force those banks with such problems to take measures to 'smoothen' out the situation to prevent foreclosure. Such memorandums issued are more than that issued in 2007. The FED has issued 32 for the state and holdings banks dated 17 June. Last year was 31. OOC and FDIC separately issued 9 and 118 memorandums dated 15 August. Last year's respective figures were 6 and 175.
Large Financial Institutions Under Pressure
Because of economic slow down and housing prices still on the decline, financial institutions are facing survival difficulties. Rumors of big US financial institutions going under or being bought over have been flying around recently.
Recently, Korea Development Bank has expressed interest in acquiring Wall Street's 4th largest investment bank Lehman Brothers. But the deal was warned by the Korea government due to Lehman Brothers very low solvency. Lehman Brothers prior plans for the sale of its assets thus ended fruitless. If the Korea Development Bank deal does not go through, analysts believes that Lehman Brothers may end up as predicted being Bear Stearns part 2.
Other than Lehman Brothers, other big US financial institutions are also facing tremendous pressure. Citi and Merrill Lynch have been on a loosing streak for 4 consecutive quarters. JP Morgan Chase is also not in a very good situation as its investments in Freddie and Fannie has shrunk due to the drop in stock prices of Freddie and Fannie. Also, the buying back of the auction-rate securities has also added a big burden to the above banks financials. Wall Street investment banks currently need to buy back about up to 40 billion.
Latest Updates
29 August 2008
- Integrity Bank of Alpharetta, Ga., on Friday became the 10th U.S. bank to fail so far this year, done in by the very business it was built on -- real estate lending.
Regions Bank of Birmingham, Ala., is assuming all of Integrity Bank's $974 million in insured and uninsured deposits in 23,000 accounts, and about $34.4 million of the bank's $1.1 billion in assets.
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