U.S. regulators close three small banks

Colorado bank failures this year could cost the nation's deposit insurance fund slightly more than $1 billion.
That represents a fifth of the $5 billion in overall losses to the fund from bank failures through July 22, said Federal Deposit Insurance Corp. spokesman Greg Hernandez.
Only Georgia, with 16 failures costing $1.5 billion, has taken a bigger bite. Colorado and Georgia combined account for half of the hit to the FDIC fund this year.
That $1 billion exceeds the $970.6 million that three Colorado bank failures in 2009, led by Greeley's New Frontier Bank, cost the fund.
Deposit insurance protects individual bank accounts for up to $250,000 and is a key reason why the country doesn't see bank runs during a financial crisis.
But when banks fail, surviving banks pick up the tab, through higher premiums to replenish the fund. Those costs eventually pass down to customers and investors.
And if things ever got bad enough, taxpayers could be asked to ante up.
"There is a bit of moral hazard involved in deposit insurance," said Matt Anderson, a managing director at Trepp, an Oakland firm that does analysis on commercial real estate and banking.
The moral hazard exists because bankers and investors, knowing they won't be fully liable if a bank collapses, may take bigger risks.
Although bank failures almost always wipe out the money investors put into banks, they also leave behind much bigger messes for everyone else to clean up.
"It is frustrating, but we built a business model that can absorb it," said Mariner Kemper, chief executive of UMB Financial Corp. "I try not to think about it too much."
The loss a failed bank passes on to the deposit insurance fund is one measure of its failure to properly price risk, said Denver banking consultant Larry Martin.
The losses at the five Colorado banks represent about 22 percent of their assets, which are made up mostly of loans.
"That is probably pretty much ballpark with what has been going on so far nationally," Anderson said.
His measures show that the bank failures in June nationwide passed on losses of 25 percent of assets, up from a 19 percent rate in April.


The FDIC said Xenith Bank of Richmond agreed to take over Virginia Business Bank's $85 million in deposits and purchase all of its assets, which total about $95.8 million.


In South Carolina, the FDIC said the three BankMeridian branches would reopen as branches of SCBT NA. Orangeburg, South Carolina-based SCBT would take over $215.5 million in BankMeridian deposits and purchase its assets of $239.8 million.


The three closures were expected to cost the FDIC's deposit insurance fund a combined $253.4 million.


On July 26, acting FDIC Chairman Martin Gruenberg told the Senate Banking Committee the balance of the insurance fund the agency uses to cover the cost of failed banks became positive in June after being negative during the 2007-2009 financial crisis.


The overall outlook for the banking industry, however, has been improving as the effects of the crisis and the recession it caused recede.


Bank failures are down so far this year and the FDIC expects the year-end tally to be below last year's total. In 2010, 157 banks failed, following 140 failures in 2009.