Failing Banks

In fewer than five years, the Federal Deposit Insurance Corporation (FDIC) was called upon twice to resolve the financial problems of the federally insured banks of the First City Bancorporation of Texas, Inc. In April 1988, FDIC provided about $970 million in an attempt to restore First City's financial health. Four years later, the two largest First City banks were deemed insolvent, and FDIC was appointed receiver of all 20 First City banks. This report answers the following four questions: Regarding the first resolution, why did the FDIC Board of Directors decide to resolve First City's financial difficulties in 1988 by providing financial help instead of using other available resolution alternatives? Regarding the second resolution, why did FDIC's estimate of the Bank Insurance Fund costs to resolve First City at the time of the 1992 failure differ so from the estimate when the banks were sold the following year? What, if any, additional cost to the Fund is expected from the second resolution of First City? What lessons does the First City experience offer relevant to the assistance, closure, and resolution process?

GAO found that: (1) in 1988, FDIC provided $970 million in financial assistance to recapitalize and restructure the banking organization; (2) FDIC chose this method of resolution because it was less costly than liquidating the banks in the event of insolvency; (3) FDIC estimated BIF costs to liquidate the banks to be about $1.74 billion, as opposed to the $970 million estimated for open bank assistance; (4) FDIC did not opt to sell the banks because it did not believe that it would be able to find acceptable buyers with sufficient capital to restore the banks to long-term viability; (5) FDIC placed the banks under its control for about 3 months and operated them as bridge banks to facilitate the orderly resolution of the banks; (6) FDIC relied on its best business judgment in estimating BIF costs at the time of the banks' failures; (7) FDIC considered loss estimates that ranged from $300 million to over $1 billion in making its least-cost resolution determination; (8) the Office of the Comptroller of the Currency could have better supported its decision to close the largest bank by ensuring that its examination reports and underlying workpapers were clear, well documented, and self-explanatory; and (9) FDIC resolution officials could have used OCC examination findings as a means of verifying its valuation of the banks' assets.