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Who Decides When a Bank Has Failed?
The federal Office of Thrift Supervision closed Washington Mutual, and named the FDIC as the receiver. Washington Mutual reportedly had $307 billion in "assets", and $188 billion of deposits. JP Morgan Chase bought the assets for $1.9 billion - and extraordinarily favorable deal, if only those assets are valued approximately correctly.
We knew that Washington Mutual was doing poorly, financially, and particularly with the recent liquidity crisis, its failure does not come as a huge surprise. But it got me thinking about how banks get shut down by the federal government, and who oversees them (between the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision), and who makes the final decision to seize a bank - all topics on which I am profoundly ignorant.
My concern is in the context of my belief - or at least strong suspicion - that the current $700 billion "rescue" package is just the latest money-grab by this administration, an attempt to get federal funds transferred to Bush and Cheney cronies on a mind-bogglingly unprecedented scale. With that in mind....
Who decides when to "seize" a bank? Is there any chance that these decision-makers may be skewing their decisions in favor of making the bank fail, to make the financial crisis appear larger than it might otherwise be, in order to cause more panic to spur Congress to agree to things that otherwise wouldn't pass deliberation? Or am I being overly paranoid by even considering that this might be a possibility?
Comments (2)
There are various regulations that govern liquidity- and possibly cache or reserve levels.
As an example, the one probably most familiar to everyone is FDIC, Federal Deposit Insurance Corp., which to simplify slightly covers up to $100,000 per person per bank for deposit products (actually institution per headquartered treasury district if the bank has split itself that way.) I.e., if the bank fails, the government coughs up your deposited funds up to $100,000.
Again, slightly simplified, the bank has X amount in deposits, but it is actually using most of the money in investments, loans etc., so at any given time, the bank almost certainly does not actually have X dollars available.
To control and assess the risk, the FDIC requires the bank to keep enough capital available. The Federal Reserve requirements state broadly 10% must be available in cash--vault cash--or as a deposit with the Federal Reserve. If the reserve drops below 6% ("undercapitalized" is the term you may see), FDIC can actually assume a degree of control over the bank, and if it drops to 2%, the bank is considered insolvent and will be taken over.
As you point out, there is actually some overlap between various government entities. Typically, though, a depository institution is seized through FDIC action.
September 27, 2008 8:14 PM | Reply | Permalink
Thank you, roo. Do we know that WaMu's reserve was below 2% at the time of the closure?
September 28, 2008 2:25 AM | Reply | Permalink
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