Federal Reserve Failed to Stop Banks’ Flawed Loans

Federal Reserve Failed to Stop Banks’ Flawed Loans, Says Inspector

American Banking News, September 11th, 2009

The Federal Reserve’s inspector general stated that the Fed had failed to curb practices that lead to significant loan losses from excessive real estate landings at two banks in California and Florida that later went under.

In a recent report, Atlanta Fed Inspector General, Elizabeth Coleman stated that Riverside Bank in Cape Coral, FL “warranted more immediate supervisory attention.” In another report, Coleman said that County Bank in Merced, California also should have had a “more aggressive supervisory” approach by the Federal Reserve. Another report filed in June faulted the Federal Reserve Bank in Atlanta had taken poor oversight of First Georgia Community Bank.

Acting Director of the Fed’s division for banking supervisor and regulation, Esther George, agreed with Coleman’s findings in a letter posted on the Federal Reserve’s website.

These findings follow criticism by lawmakers including Chris Dodd, the Senate Banking Committee Chairman, who stated that the Fed failed to stop flawed underwriting and other abuses that contributed to the near collapse of the housing market. Currently, the Congress is reviewing a proposal from the U.S. Treasury that would give the fed additional power by making the supervisor for large, interconnected firms that could potentially damage the U.S. financial system in the event of failure.

Riverside Bank’s failure will likely result in a loss of $201.5 million which is about 37.5% of the bank’s $537 million in assets according to the FDIC. Coleman stated, “Emerging problems observed during a 2007 visitation provided FRB Atlanta with an opportunity for a more aggressive supervisory response.” According to Coleman, the Fed’s stepped up supervision should have included “conducting an asset quality target examination, requiring the bank to prepare a new capital plan or further accelerating the full-scope examination that was conducted in March 2008.”

Out in California, County Bank’s failure will cost the FDIC’s deposit insurance fund about $135.8 million. Coleman wrote, “We believe that the magnitude and significance of County’s asset quality deterioration and credit administration deficiencies that emerged in the summer of 2007, coupled with management’s disagreement with regulators, warranted a more direct and forceful supervisory response. ”