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The year without a bank failure


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The year without a bank failure

Regulators closed no U.S. banks in 2018, marking the first year without a failure in more than a decade.

The lack of closures reflects the banking industry's high capital levels and credit quality. While investors may be concerned about the increasing cost of deposits in a rising interest rate environment, it is a far cry from fears about credit and liquidity that plagued the industry during the financial crisis.

Closures have dropped precipitously since their post-crisis peak of 157 failures in 2010. There have been fewer than 20 failures a year since 2014, including eight in 2017. Prior to 2018, the last year without a bank failure was 2006, according to S&P Global Market Intelligence data.

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The most recent bank failure occurred a little more than a year ago and wound up being costlier than regulators estimated. Regulators closed Washington Federal Bank for Savings on Dec. 15, 2017, after uncovering a "major fraud" perpetrated by employees of the Chicago-based bank that depleted capital and led to insolvency. The final cost to the Federal Deposit Insurance Corp.'s deposit insurance fund was $82.6 million, up from the initially expected $60.5 million. Royal Savings Bank, a unit of Royal Financial Inc., agreed to assume the insured deposits and roughly $23.7 million of the assets.

The lack of failure activity may be difficult to maintain through 2019, said William Isaac, head of global financial institutions at FTI Consulting and head of the FDIC between 1978 and 1985.

"I think zero is an aberration," Isaac said in an interview. "Ten to 15 bank failures a year, most of them small, is a fairly normal thing."

Regulators did hand out two prompt corrective actions to community banks in 2018. Under prompt corrective action, or PCA, provisions established in 1991, regulators must impose enforcement actions as a bank's capital level declines.

"The purpose of PCA was to force supervisors to intervene in the operations of a bank and even shut it down, if necessary, before a bank becomes too severely distressed," wrote Federal Reserve Bank of Richmond researchers in a 2015 working paper. A bank becomes "critically undercapitalized" when its ratio of tangible equity to total assets reaches 2% or lower.

"When a bank is critically undercapitalized, the bank must be put into receivership or conservatorship within 90 days," the researchers wrote.

Rogersville, Tenn.-based Civis Bank received a PCA directive from the FDIC on June 28, 2018, that described it as "significantly undercapitalized" with a "capital condition [that] continues to rapidly deteriorate." At the end of the 2018 third quarter, the bank reported a risk-based capital ratio of 6.18% and a leverage ratio of 3.19%.

Newark, N.J.-based City National Bank of New Jersey received a PCA directive from the Office of the Comptroller of the Currency on Nov. 1, 2018. The bank reported a risk-based capital ratio of 5.68% and a leverage ratio of 2.32% at the end of the 2018 third quarter.

Civis Bank and City National Bank of New Jersey did not respond to S&P Global Market Intelligence's requests for comment.

While regulators shuttered no banks in 2018, at least one lender decided to voluntarily wind down. Towson, Md.-based Maryland Financial Bank will liquidate amid rising losses and a declining number of customers as the industry consolidates. Losses for the bankers' bank jumped to $1.4 million in the year through Sept. 30, 2018, from $584,000 for all of 2017. Under the liquidation and dissolution plan, the bank will sell all of its loans, return all deposits and pay 25 cents to $1 per share to shareholders, according to a Baltimore Business Journal report.