What Causes Banks to Fail

One week ago All American Bank, 9372 W. Ballard Road, was closed by state regulators, the Illinois Department of Financial and Professional Regulation Division of Banking, according to an announcement by the FDIC on its website.

The Federal Deposit Insurance Corporation was named the receiver on paper, and the International Bank of Chicago took over all deposit accounts, including brokered deposits, in a seamless process that does not interrupt service for depositors.

Patch investigated what it means when banks fail, and what causes the failures.

Earlier:

Victor Stasica has been in banking all his life. Currently he is a banker at , and he is the treasurer of .

Stasica said when banks close there is no change for bank customers, and it is of little significance for customers or Des Plaines residents.

“The consumer doesn’t see the problem with collecting the bad loans,” Stasica said. “The ones who see it are really the bank taking it over, and the FDIC. They have to recover the assets to pay the liabilities, which is the deposits.”

All American Bank was the 85th bank to fail nationally this year, and the ninth in Illinois, MyBankTracker reported.

In 2010 157 banks failed compared to 140 in 2009. Before that, 25 failed in 2008, and only three banks closed in 2007, according to FDIC records.

“It’s pretty much on a downward curve,” Stasica said. “A lot failed last year and in 2009. This year there haven’t been many because most of the bad loans have surfaced previously.”

As of the second quarter All American bank had approximately $37.8 million in total assets and $33.4 million in total deposits, MortgageOrb reported.

While those numbers do not appear very far apart, the key factor is the quality of the assets, Stasica said. Just because a bank states the asset does not mean it will be collected. Another institution might have the same numbers, and yet be considered healthy.

Stasica said he was not familiar with All American Bank’s profile, but the public can visit the FDIC’s website and others including BankRate.com to find that information.

He said most of a bank’s assets are loans; some are investments and securities. Nine times out of 10 failing banks have problems with real estate, Stasica said.

"When banks fail the causes are usually bad management," Stasica said.

“Bad management makes bad loans, so then they have losses,” Stasica said. “That’s number one. Very seldom does a bank fail for any other reason.”

There are two sides of a bank, deposits and assets, Stasica said. The assets are loans and investments. When too many loans turning sour, or are flawed to begin with, it impacts the earnings of the bank, which impacts capital.

If a bank doesn’t have enough capital then it's insolvent, which means its liabilities are greater than its assets, and it has no net worth, Stasica said. So then the government, which insures the deposits, has to step in to protect the depositors.

The government insures deposits to make sure there’s continuity for the depositors to get their money and have faith in the banking system, Stasica said.

Connect on Facebook.