1. 11/27/2016
Assignment on
California National Bank, CA
PREPARED BY:
RAKIBUL HOSSEN
ID: M 160203572
SECTION – B
EMBA – 7TH
BATCH
DEPARTMENT OF FINANCE
JAGANNATH UNIVERSITY
Submitted To
Shaikh Mashrick Hasan
Assistant Professor
Department Of Finance
Jagannath University
2. Page | 1
California National Bank was a consumer and business bank in the Southern California
area. It had 68 branches mostly in Los Angeles and Orange counties which had been expanding
rapidly in Southern California.
Cal National Bank originally began in 1996 when FBOP Corporation acquired Torrance Bank.
Two years later, FBOP acquired five branches of Topa Savings and Topa Thrift, establishing
California National Bank.
FBOP Corporation was a financial company based in Oak Park, Illinois, United States. As of
mid-2009, it had $18.5 billion in assets and was the 46th largest bank holding company in the
United States. On October 30, 2009, FBOP's banking subsidiaries were closed by their chartering
agencies and the Federal Deposit Insurance Corporation was appointed as their receiver.
FBOP's subsidiaries lost an estimated $800 million when the United States Treasury placed
government-sponsored mortgage investors Fannie Mae (FNM, Fortune 500) and Freddie
Mac (FRE, Fortune 500) into conservatorship and wiped out preferred stockholders. As a result,
FBOP posted an operating loss of $708 million for 2008. By the end of June, FBOP's resources
had dwindled so low that the firm ranked below 98% of similar bank holding companies in terms
of tier 1 leverage ratio, a measure of bank capital.
In August 2009, FBOP signed a so-called written agreement with the Federal Reserve that gave it
a schedule to raise capital, improve risk management and reduce its concentration of commercial
real estate loans. The bank was to submit a capital plan within 30 days.
FBOP failed to raise enough capital to satisfy the terms of the agreement. So, on Friday, October
30, 2009, California National Bank, Los Angeles, CA was closed by the Office of the Comptroller
of the Currency, and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No
advance notice is given to the public when a financial institution is closed.
After closing the bank, all deposit accounts have been transferred to U.S. Bank National
Association (U.S. Bank). The former California National Bank locations will reopen as branches
of U.S. Bank during regular business hours.
California National has had its share of lending problems. As of June 30, the last time it reported
its financial results publicly, the bank had five times as much foreclosed property on its books and
twice as many non-current loans as it had a year earlier. But the bank's main problem was its loss
on the Fannie Mae and Freddie Mac preferred shares.
California National Bank, with $7.8 billion in assets and $6.2 billion in deposits, is the
fourth-largest commercial bank based in Los Angeles County. The collapse of FBOP's banks,
attributed to losses on securities issued by the giant mortgage companies Fannie Mae and Freddie
Mac.
3. Page | 2
Analysis Outcome:
The main reason of the failure is over lending in real-estate and buying securities of Fannie Mae and
Freddie Mac. When the real-estate market collops California National Bank ultimately
experienced a huge bad loan and they also lost their capital as Fannie Mae and Freddie Mac
company failed.
In terms of the Banking sector in Bangladesh there is no direct situation like USA but still, there
are some similarities and dissimilarities. Some commercial banks in our country are lending too
much ignoring the risk of non-repayment by the borrowers. They are avoiding the history of non-
performing loans. This over exposure may create jeopardy for the banks. Some of this may go bust
because a huge amount of banks investments as loans & advances may be written off in future.
Corruption, insider lending & mismanagement are linked to the high exposure of the banks. These
factors will stimulate to wipe out the bank’s capital and some banks may fall under bankruptcy in
result.
Recommendations:
1. Risk-based loan pricing can be introduced for different sectors to ensure smooth cash flows
& solvency of the banking sector.
2. Good practice of corporate governance should be implemented to avoid corporate
malpractice & frauds. The role of the board of directors including independent directors
should be clearly monitored by the regulator to ensure independence & to avoid conflicts.
3. Directors bonuses should be based on good performance at minimum risk level instead of
only accounting profit. Banks risk appetite & risk tolerance should be understood by the
board to take decisions.
4. Treasury divisions of the banks should be focused much on hedging & cost savings. A lot
of unnecessary activities taken by the banks push huge expenses which erode the
profitability of the banks. These activities create extraordinary targets and influence the
management to take extra risks.
5. If there exists any potential synergy, some banks can be merged to reduce risk based assets,
to optimize efficiency and to maintain the required Capital Adequacy Ratio.
6. Banks should develop a whistleblowing culture to battle against unethical consequences.
