Lately, it seems that as each week comes to a close, we hear about yet another bank failure. Thirty two banks have failed so far this year, already surpassing the total tally for 2008's bank failures. And there doesn't seem to be a slowdown in sight. Earlier this year, the Federal Deposit Insurance Corporation said that the number of U.S. banks on its "Problem List" jumped by nearly 50 percent to 252 in the fourth quarter of 2008.

So how is it determined that a bank can no longer function?

The FDIC says that a chartering authority -- which can include individual state banking departments, the Office of the Comptroller of the Currency, or the Office of Thrift Supervision -- closes the struggling bank and will appoint the FDIC as the receiver.


William Ruberry, spokesman for the Office of Thrift Supervision, which regulates more than 800 federal savings banks said that in consultation with a number of representatives, including OTS supervision staff that examine the books inside a bank, and the FDIC, a joint decision is made on whether a bank is in a position to continue operating safely and soundly.

"Given the current stresses in the financial markets, some of our institutions have faced severe problems and severe struggles. And in some cases it's gotten to the point where they don't have the resources to continue operating anymore," he says.

That's where the FDIC gets involved. Spokesman David Barr explains what happens next.

Q: How is it determined what bank is going to take over the failed institution's deposits?

A: When the FDIC is notified by the chartering authority that a bank is going to be closed, we begin our marketing effort. The FDIC will send an e-mail notice out to banks that have expressed an interest in bidding on troubled institutions. Depending on the circumstances, it could be as few as a hundred, or as many as five or six hundred. We let those banks know that there is an opportunity for them, and if they are interested, to sign the confidentiality agreement we attach to the e-mail.

For those that sign the agreement, the FDIC will send another e-mail with some very basic information about the troubled bank, such as general geographic area and asset size range. Another confidentiality agreement will be attached. If they want more information, then they must sign the second agreement. Those that do, will be provided access to a secured Web site with complete financial and demographic information on the bank, along with its name. They are also told when and where to submit their bid if they are interested in taking over the institution. Bids are typically due the Tuesday before the bank is scheduled to be closed. The FDIC will analyze all the bids, and will base its selection on the one that is considered least costly to the insurance fund.



Q: When are banks typically notified of the takeover?

A: The FDIC does not give advance notification that a bank is going to be closed. Most of the employees and customers of the bank find out about it after it is officially closed by the chartering authority. There have been many cases where a closing is called off at the eleventh hour and never happens.



Q: Why is the information generally released to the public on Friday evenings? To avoid panic or a run on banks?

A: Banks can be closed on any day of the week, and they have. Typically, however, they are closed at the end of the business day on Fridays. This gives the FDIC the luxury of 48 hours to complete the merger with an assuming bank. The FDIC is essentially completing a merger between two banks. The more time we have the better. Most banks that merge voluntarily take up to three to six months to complete the deal.


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