FDIC gets unfettered ability to probe banks

By Associated Press
Posted July 12, 2010 at 1:59 p.m.

Federal bank regulators have agreed to give the Federal Deposit Insurance Corp. unlimited authority to investigate banks, clarifying the agency’s power that was in question during the financial crisis.

The FDIC’s board on Monday approved the agreement between the insurance agency and regulators at the Federal Reserve and Treasury Department. It clearly spells out the FDIC’s authority to make special examinations of banks. It was approved 5-0.Federal bank regulators were widely criticized during the financial crisis for failing to signal high-risk practices before the institutions failed.

The FDIC, which takes over failed banks, has said it lacked access to needed information to evaluate banks’ risk.

The FDIC is the “backup” regulator for banks, empowered to examine banks’ condition and operations. That is in addition to the authority held by their primary federal regulators: the Fed and two Treasury Department agencies, the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

The agreement, a so-called memorandum of understanding, was signed by the FDIC, the Fed and the two Treasury Department agencies. It updates a similar accord that took effect in 2002, which the FDIC said limited its ability to effectively assess risk at weakening banks and to put together strategies for resolving them after they failed.

Among other things, the 2002 agreement required the FDIC to conduct its special exams of banks duringĀ  the periodic reviews by their primary regulator. The FDIC was blocked from examining banks deemed financially healthy by their primary regulators.

“The past financial crisis provided us with a strong and sober reminder that the activities of large banks are often very complex and opaque,” FDIC Chairman Sheila Bair said before the vote by the agency board at a public meeting. “The FDIC needs to have a more active on-site presence and greater direct access to information and bank personnel in order to fully evaluate the risks to the deposit insurance fund on an ongoing basis and to be prepared for all contingencies.”

Since the start of last year, 230 U.S. banks have failed amid mounting losses on loans and the toughest economic climate since the 1930s. The failures have sapped billions of dollars out of the deposit insurance fund, which fell into the red last year. Its deficit stood at $20.7 billion as of March 31.

Examining the September 2008 collapse of Washington Mutual, with $307 billion in assets the biggest U.S. bank ever to fail, the Treasury Department’s inspector general recommended that the FDIC be assured adequate access to banks’ information so that it can assess their potential risk to the insurance fund.

The FDIC “must be able to make its own independent assessment of risk to the (insurance fund) without a requirement to prove a requisite level of risk and without unreasonable reliance on the work” of the primary regulator, the Treasury inspector general, Eric Thorson, said in the report issued in April.

Thorson wrote that officials of the FDIC and Office of Thrift Supervision spent weeks sparring over Seattle’s WaMu as the credit markets seized up in 2008. Bair testified at a Senate hearing that the FDIC couldn’t do anything about WaMu’s position because the 2002 interagency agreement prevented it from examining banks considered by their primary regulators to be financially healthy.

WaMu was sold for $1.9 billion to JPMorgan Chase & Co. in a deal brokered by the FDIC.

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One comment:

  1. Grace LeMore July 12, 2010 at 3:51 pm

    Dumb and dumber give the dumbest more power!!!! Isn’t this like giving BP the power to regulate the oil industry?!?! Sheila Bair is just about the only person hiring in this economy-soon she’ll be too big to fail.

    How long can we tolerate this government nepotism?