Bank Refuses to Fail, Gets Bad Rating by the FDIC

jlzimmerman

FDIC Criticizes Massachusetts Bank With No Bad Loans for Being Too Cautious http://www.bizjournals.com/boston/stories/2009/03/16/story3.htm

- A Massachusetts bank that has defied the odds and remained free of bad loans amid the economic crisis is now being criticized by the Federal Deposit Insurance Corp. for the cautious business practices that caused its rare success. The secret behind East Bridgewater Savings Bank's accomplishments is the careful approach of 62-year-old chief executive Joseph Petrucelli.

"We’re paranoid about credit quality," he told the Boston Business Journal. That paranoia has allowed East Bridgewater Savings Bank to stand out among a flurry a failing banks, with no delinquent loans or foreclosures on its books, the Journal reported. East Bridgewater Savings didn’t even need to set aside in money in 2008 for anticipated loan losses. But rather than reward Petrucelli's tactics, the FDIC recently criticized his bank for not lending enough, slapping it with a "needs to improve" rating under the Community Reinvestment Act, the Journal reported.

The problem, according to FDIC data, was that from late 2003 through mid-2008, East Bridgewater Savings made an average of 28 cents in loans for every dollar in deposit — a sharp contrast to the 90 percent average loan-to-deposit ratio among similar banks, the paper reported. "There are no apparent financial or legal impediments that would limit the bank’s ability to help meet the credit needs of its assessment area," the FDIC wrote in the CRA evaluation.

The agency also faulted the bank, which does not have a Web site, for not promoting its loan products enough, the Journal reported. Considering his bank is doing well in tanking industry and even the FDIC’s deposit insurance fund is in trouble after paying for an upswing in bank failures, Petrucelli told the Boston Business Journal that the negative rating caught him by surprise.

East Bridgewater Savings ended 2008 with $135 million in assets, deposits of $84 million, $87,000 in profit, and a Tier 1 risk-based capital ratio of 31.6 percent — more than three times higher than many community banks in Massachusetts, the Journal reported. Its net loans and leases equaled 21 percent of assets, compared with 72 percent among 385 similar banks across the country.

Matt Marvel

That's pretty ridiculous. They get a slap on the wrist for not doing what other banks are doing. Kudos to the these guys for realizing that what other banks are doing isn't a good idea.

bigharpoon

That's too bad they got their rating lowered, this is the kind of sustainable banking practice which would have kept us out of the trouble we're in.

For your information and a little bank practice knowledge some of those statistics are exceptionally misleading. For example: the loan to deposit ratio. This would lead one to believe that the bank has loaned out 28 cents for each dollar note of currency sitting in it's vault, but this is nowhere near accurate. Here's why:

Say a guy goes into a bank for a loan. He has collateral and the bank loans him $100. That bank is now in debt $100 with a guy's promise to re-pay that debt in the future. The same guy leaves and goes to his own bank and deposits the $100 so he can spend it. The second bank accepts this $100 as the equivalent of cash and can start writing loans against it. There is a ratio of how much in loans to deposits they can write...it's 10 to 1. So bank #2 writes $1000 worth of loans against this guys deposit of only $100, which isn't really money but a promise to pay money.

Bank #2 gives a guy a loan (or several guys, it doesn't matter) for $1000, totally legal, based on $100 in deposit. He goes and deposits this in his bank so he can spend it. That bank accepts this $1000 as equivalent to cash and can write up to $10,000 in loans against it. Bank #3 writes the $10,000 in loans against its received deposit of only $1000 and when that gets cashed...you guessed it...$100,000 in loans can be written.

So just a few banks writing loans can take one guy's promise to pay $100 and turn it into $100,000 in loans, or more, because the note from the previous bank is accepted as the equivalent of currency. So even if a bank accepted $10,000 in deposits and only wrote $2,800 in loans against it there is every reason to believe that the $2,800 is still WAY MORE than the actual value sitting in the original bank's vault, which is simply a promise to pay $100.

Our country's economy is based on creation of wealth through the creation of debt. This example doesn't even consider interest. It's not a sustainable system and eventually someone has to pay the debt. There simply isn't enough value in circulation to pay off all the debt we create so people will always be foreclosed on to some extent. We will always have debt to some extent until our system is fundamentally changed.

I didn't mean to rant or go off on a tangent, but this stuff irks me and when a good bank is devalued because it doesn't loan enough I get fired up.

Dude Love

Ha, I'm gonna have to tell my economics professor about this tomorrow.

betasynn

Bigharpoon, excellent post.

kuzi16

but whenever i bring up that the government pressured banks into making loans the only response i get back is something along the lines of: no, the corporate greed bla bla bla... banks wanted everyone to fail so they could foreclose on them bla bla bla.... its all bush's fault bla bla bla... yeah....

Richard M. Salsman:

... America today does not enjoy a free-market system—let alone a free-market financial sector—nor has it enjoyed one for most of the past century. Only through a profound misunderstanding of what constitutes a free-market system could anyone honestly blame capitalism for the financial crisis. For decades the American politico-economic system has been a mixed system—a combination of some freedom of choice and action offset by large (and growing) coercive interventions. It was precisely these coercive elements—the regulation, taxation, and subsidization—that caused today’s financial crisis. Washington’s recent and massive interventions did not follow from free-market “failure”; they followed from the market distortions caused by prior government intervention in the economy. Government interventions have both instigated and aggravated the latest financial crisis.

Mr. Salsman is president of InterMarket Forecasting, Inc., an investment forecasting and consulting firm in Durham, N.C. He is the author of numerous books, chapters and articles, including Breaking the Banks: Central Banking Problems and Free Banking Solutions (1990) and Gold and Liberty (1995), both of which were published by the American Institute for Economic Research.

gmill880

kuzi16:

but whenever i bring up that the government pressured banks into making loans the only response i get back is something along the lines of: no, the corporate greed bla bla bla... banks wanted everyone to fail so they could foreclose on them bla bla bla.... its all bush's fault bla bla bla... yeah....

Richard M. Salsman:

... America today does not enjoy a free-market system—let alone a free-market financial sector—nor has it enjoyed one for most of the past century. Only through a profound misunderstanding of what constitutes a free-market system could anyone honestly blame capitalism for the financial crisis. For decades the American politico-economic system has been a mixed system—a combination of some freedom of choice and action offset by large (and growing) coercive interventions. It was precisely these coercive elements—the regulation, taxation, and subsidization—that caused today’s financial crisis. Washington’s recent and massive interventions did not follow from free-market “failure”; they followed from the market distortions caused by prior government intervention in the economy. Government interventions have both instigated and aggravated the latest financial crisis.

Mr. Salsman is president of InterMarket Forecasting, Inc., an investment forecasting and consulting firm in Durham, N.C. He is the author of numerous books, chapters and articles, including Breaking the Banks: Central Banking Problems and Free Banking Solutions (1990) and Gold and Liberty (1995), both of which were published by the American Institute for Economic Research.

Saw it firsthand upclose and personal in my banking days ....But I do miss having every conceivable holiday off plus 3 weeks pd vac and ALL weekends off (why the he_ll did I leave that gig ?)