When three Georgia banks shut down on the same day last week, it was business as usual for the banks' customers — their checks and bank cards still worked and people could walk into their local branches and do business just like the day before. That's because state banking regulators had worked behind the scenes for months to ensure a smooth transition.
During most bank failures, states have an important role to play, working alongside the Federal Deposit Insurance Corporation. Since December 2007, when the Great Recession began, state and federal regulators have seized 290 banks for coming dangerously close to being unable to meet their obligations to depositors. Many more banks will likely close their doors before 2010 is over, thanks mostly to failed commercial real estate deals and an overall weak economy. (Story continues below.)
Bank failures by state since December 2007
Of the nation's 7,830 banks, approximately 70 percent are state chartered. They tend to have smaller assets and more of a community focus than the big national banks regulated at the federal level. For both state and national banks, the FDIC insures all individual bank deposits up to $250,000.
State regulators work hand-in-hand with the FDIC to ensure that state-chartered banks maintain healthy cash balances. When a bank appears to have failing assets and shrinking cash reserves, it's up to the state to sound the alarm. State regulators set a date to shut the bank down, usually at least a year in advance. The FDIC may tweak the exact closure date to fit its increasingly busy work schedule — or, the federal regulators may urge the state to move more quickly if they're concerned the bank's financial condition could precipitously worsen.
By federal law, the FDIC can override a state's decision to close a bank. But that rarely happens, and in this recession, it has not happened once. "The state is looked to for the historical perspective on the assets," says Karen Williams, a banking consultant and former FDIC analyst. "They know the lay of the land."
Once the decision to take down a bank is made, the state is called on to help find a buyer. Banks apply to the FDIC to purchase a failed bank's deposits and assets, but the decision must be approved by state regulators. Of the 125 banks that have failed this year, 118 of them were immediately taken over by healthier banks with stronger portfolios.
"If you're a bank with a lot of capital and a clean balance sheet, this is a good time," says Michael Stevens, regulatory affairs director at the Conference of State Bank Supervisors . In most cases, Stevens says, the takeover process is seamless to consumers. And while nobody likes to see a bank fail, the result is a stronger banking system, Stevens says. "Every week, we see the banking system healing itself."