Yesterday, the Orange County Register banged away at bank regulators’ bizarre six-year paralysis in the face of IndyMac’s blatantly unsafe and unsound lending practices. Today Bloomberg follows with a good account of clay-footed regulators’ too-late shutdown of New Frontier Bank, which had been an important regional commercial player, based in Greeley, Colorado, and cost the FDIC’s insurance fund $670 million.
Of course, that’s chump change as far as financial-sector catastrophes go these days, putting New Frontier way back at tenth on the list of bank failures this year. Still, with financial regulatory reform still bobbing somewhere in the public policy irrigation ditch, Bloomberg does well to revisit how and why regulators miss red flags, particularly ones that are obvious to them but not readily visible to the public.
A classic one is so-called brokered deposits, the non-local money brought in by pros that requires a bank to pay higher-than-average rates for its funding (my emphasis).
The over-reliance on such deposits was evident to state and federal regulators for years. Brokered deposits rose almost fivefold to $121 million in 2005, or 19 percent of New Frontier’s total, from $26 million, or 6 percent, at the end of 2004. By March 31, 2008, they accounted for 41 percent. By comparison, brokered deposits made up 8.4 percent of the deposits at similarly sized banks nationwide in March 2008, according to FDIC reports.
It’s puzzling to read. Why would a regulator go along with that?
Also, New Frontier was making loans that its competitors turned away:
“We have seen a substantial number of their loans, and they are not bankable,” said Leroy Leavitt, chairman of New West Bank in Greeley, which has $147 million in assets. “We would never have made those loans in the first place.”
Leavitt said he was puzzled that regulators hadn’t acted sooner.
The Bloomberg entry supplements other good work on New Frontier by the Greeley Tribune, the Denver Post, and The Wall Street Journal. For a terrific analysis and links to the best coverage, read our Elinore Longobardi’s terrific piece from last month, “Three Faces of Greeley.” She found, among other things, that the Post did the best job covering the human side of the failure, particularly among the region’s dairy farmers, an angle given less attention by national outlets.