BANK FAILURE

1
BANK FAILURE

• Case Study Chokio State Bank

2
Implications of Bank Failure

• Liabilities exceed assets
• Negative Capital (Net Worth)

3
Common Factors among Bank Failures

• Managerial weaknesses
• Poor internal routines and controls
• Fraud
• Economic Conditions

4
Susceptible to Failure??

• Low capital-to-assets ratio
• Low cash-to-assets ratio
• High demand debt and short term debt-to-total
  debt (deposit) ratio

5
THE FDIC

• Founded in 1933 to restore public confidence in
  the banking system post depression
• Identifies and corrects problems of failing banks
• Insures deposited money up to 100,000
• Currently insures more than 3 trillion of U.S.
  deposits
• FDIC is funded by insurance premiums by member
  banks

6
Role of the FDIC

• FDICs role in bank closures
• State closes bank
• FDIC sell deposits and loans

7
Case Study Chokio State Bank

• Chokio population 560
• Agricultural region
• Agricultural boom of the 70s led to increased
  land value
• Agricultural recession of the 80s led to
  decreased land value

8
Rural Bank

• Bank relied on agricultural community
• Decrease in land and equipment value left little
  means of insuring the value of loans
• Doon.. DA,..Doon..DoonDooon!!!!
• The bank was in trouble!!

9
Bank closes and FDIC takes over

• Bank was sold simultaneous to its closure
• FDIC takes over 8.5 million of the 9.5 million
  loans
• Majority of loans under FDIC control
• Led to widespread hardship

10
Complications

• FDIC issues two party income checks
• FDIC encouraged outside financing in order to
  repay debt
• Led to some illegal activity