Ten states concentrated in the western, Midwestern, and southeastern United States—all areas where the housing market experienced strong growth in the prior decade—experienced 10 or more bank failures between 2008 and 2011.86-percent of the failed banks were small institutions with assets less than $1 billion.
CRE and ADC concentrations were often correlated with poor risk management and risky funding sources.GAO analysis found small banks often pursued aggressive growth strategies using non-traditional and riskier funding sources such as brokered deposits.
GAO found that 2/3 of assets at failed banks were classified as Held-For-Investment
Under GAAP, the accounting model for estimating credit losses is referred to as the “incurred loss model” because of the timing and measurement of losses are based on estimates as of the balance sheet date.Justifying significant loan loss provisioning can be difficult under this model.
FDIC preferred method is to sell the failed bank to another, healthier, bankSales include a Loss Share Agreement (Specific Assets)Banks balked.Banks rarely suffered capital lossesFDIC ate the bad loans, while banks got healthy loans
One Type of Loan Causes Small Banks to Fail
Brian S. McDaniel
Largely Related to Nonperforming R/E Loans
Commercial Real Estate (CRE)
Acquisition, Development, and Construction
Highlight the Impact of Impairment
Accounting and Loan Loss Provisioning
Credit Losses and Charge-offs
Contributed to Failures
Fair Value Accounting Did Not Contribute
Current Accounting Practices May Have
FDIC Attracted Bidders at Least Cost to
the Deposit Insurance Fund
Health Banks Balked
Market Concentration Did Not Shift
8 of 188 metropolitan areas met criteria
5 of 68 rural communities met criteria