Fed stalls on Chinese bank deal, costs taxpayers $1.7 billion

fed-stalls-on-chinese-bank-deal-costs-taxpayers-billionsWith regulators having seized 123 banks so far this year, one might think the Federal Reserve and Federal Deposit Insurance Corp. would be looking everywhere to find potential buyers for failed financial institutions' deposits and assets. But there's one place to which they're apparently not quite ready to turn: China.

When San Francisco-based United Commercial Bank failed on Nov. 9, the Fed was weighing an application by Chinese bank Minsheng to step in and take it over. But while it considered whether Chinese regulators were prepared to oversee a bank with operations on both sides of the Pacific, time ran out and UCB was shut down.
According to the Financial Times, U.S. taxpayers could have saved $299 million, the amount UCB received in bailout funds from the Treasury Department, and the FDIC could have held onto $1.4 billion from its dwindling deposit insurance fund if Minsheng deal had been given the green light.

Instead, the FDIC chose East West Bancorp (EWBC) to assume UCB's 63 branches and $7.5 billion in deposits. Though it's certainly an expensive match, it also seems to be a good one, since both companies cater to Chinese-American communities and Chinese regulators have cleared East West to take over UCB's branches there.

"Chinese authorities are working hard to meet the standards that would allow them to buy banks in the United States, but these things take time," Fed sources told the Financial Times.

Indeed, this isn't a simple matter of financial protectionism. After all, British bank Barclays Plc. (BCS) and Japanese bank Nomura (NMR) bought big pieces of Lehman Brothers after its bankruptcy last year.

And, across the country, many big regional banks are owned by foreign companies, including Citizens Bank and Sovereign Bank on the East Coast and Union Bank and Bank of the West in California, among others. In other words, there's certainly no blanket ban on foreign banks going shopping in the U.S., whether it be in the FDIC's bargain bin or elsewhere.

Foreign firms have even been able to assume failed banks' deposits from the FDIC. When Texas-based Guaranty Bank failed in August, the buyer was Banco Bilbao Vizcaya Argentaria (BBV), or BBVA, a Spanish financial institution that has been buying up banks across the American South and West for the last five years.

Chinese banks aren't completely barred from investing in U.S. financial firms; in fact, Mingshen held a nearly 10% stake in UCB. But that raises at least one question: If Chinese banks are already looking for American acquisitions, will the Fed be ready next time?

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