With the FDIC set to put Colonial out of our misery, the fifth largest bank failure in U.S. industry is under way. These days, we’ve gotten so used to big-bank blow-outs that this one may barely break out of the back of the business section. It’s important, though, and not just because it will force still more costly special assessments by the FDIC on surviving institutions. Colonial’s failure also matters because it’s just the first of a new wave of sizeable collapses. With them will come renewed Congressional focus on bank policy and a shot in the arm to the Obama reform plan. Facing a choice between what people think of them and what they may think about the details of complex legislation, Members of Congress waste little time in responding to public sentiment and moving any measure they think they might get blamed for delaying.
Why so pessimistic about the prospects for still more failures? We’ve taken a look at the details not only of Colonial, but also of Corus and Guaranty Financial. Between them, they come close to Colonial in size and each is at least as much on the brink. Indeed, both have said they expect to be closed, with the FDIC only allowing them to continue to flat-line because it’s hoping for some sort of orderly resolution that doesn’t deepen the DIF’s hole even more. That hole is gaping – Bloomberg today calculated that distressed banks other than the bigger ones in the FRB’s stress test had deposits of $193 billion – fifteen times the DIF. Add GMAC to the list and DIF’s woes worsen. And, even without GMAC or very large, very weak banks – Citi and BofA anyone? – the DIF’s DOA.
This is, we would say, not the strongest place from which to commence lobbying. Even if systemic-risk worries have been alleviated, ongoing, big failures do not put banks or bank regulators in a favorable light. Each one of these cases raises significant policy questions. At Colonial, for example, we wonder why Alabama regulators happily took the bank from the OCC in June of 2008, when its problems were not exactly subtle. Regulators have now stoutly promised to resist temptation and block enforcement dodging charter conversions. Members of Congress were, though, already skeptical about the ability of banks to govern themselves and of the complex regulatory system to rein them in when they couldn’t. With still more poster children of mismanaged banks and turf-focused regulation, everyone’s going to have a whole lot of explaining to do before they get to the asks on their list.