One Type of Loan Causes Small Banks to Fail

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Summary of a GAO Report on Bank Failures

Summary of a GAO Report on Bank Failures

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  • 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


  • 1. Brian S. McDaniel
  • 2.  Largely Related to Nonperforming R/E Loans  Commercial Real Estate (CRE)  Acquisition, Development, and Construction (ADC)  Highlight the Impact of Impairment Accounting and Loan Loss Provisioning
  • 3. Credit Losses and Charge-offs Contributed to Failures Fair Value Accounting Did Not Contribute
  • 4. Current Accounting Practices May Have Delayed Reporting
  • 5. FDIC Attracted Bidders at Least Cost to the Deposit Insurance Fund Health Banks Balked
  • 6.  Market Concentration Did Not Shift  8 of 188 metropolitan areas met criteria  5 of 68 rural communities met criteria
  • 7.    y=177495625&hash=41aba5859000585f21d068 0e6d8843f2