Community Bank and Financial Crisis

Carter Young & Chin Hwa Tan

Topic Overview What is a Community bank? Systemic Risk Bank Failure

Community Bank Strong relationship with the

community Asset size less than $10 BILLION The primary source of lending for

Small businesses Farms

Bread-and-Butter banking Deposits Loans

Systemic Risk “The possibility that a triggering

event, such as the failure of an individual firm, will seriously impair other firms or markets and harm the broader economy”

Community banks were too small to be considered “systemically important”

Systemic Risk (cont.)

Interconnectedness Dominos effect of bank failure

Correspondent banking

Benefit of using correspondent bank Achieve economies of scale Pool fed funds Loan participation

Systemic Risk (cont.)

Silverton Bank, GA Closed by Office of the Comptroller of the

Currency (OCC) Federal Deposit Insurance Corporation named as

receiver TIB appointed as Operations Manager Bad lending practice cause Silverton Bank’s TIB manage to save all Silverton customers’ Fed

Fund

Bank Failure 215 bank failures between January

25, 2008 and April 16th, 2010 Only 7 Big banks fail

Balance Sheet Asset

Loans loan loss reserve

ASC ASC 310-10-35-2 (allowance for doubtful accounts for their loan asset account)

Liability deposits

Bank Failure (cont.)

Reasons for banks failure Lack of diversity in lending Bad management and loan approval Subprime mortgages

Prepaid Assessment Not another special assessment Purpose – Replenish FDIC’s Deposit Insurance

Fund prepay 3 years worth of deposit insurance

premiums at the end of 2009 ( $45 billion)

Bank Failure (cont.)

Supervisory Capital Assessment Program (stress test)

Usage of capital provides a cushion against the risk of failure provides the funds for bank operations promotes public confidence and reassures

creditors provides funds for banks to create new services serves as a regulator of growth for banks

Bank Failure (cont.)

Basel I Tier 1 (core) capital Tier 2 (supplemental) capital Adequately capitalized bank should have

A ratio of Tier 1 capital to risk-weighted assets of at least 4% and

A ratio of total capital to total risk-weighted assets of at least 8%,

Basel II Minimum capital requirements Supervisory review Greater public disclosure

Questions & Answers