The regulators as well as the executives are equally to blame for bank failures linked to the foreclosure crisis

The regulators as well as the imprudent behaviour of the executives are equally to blame for the cascading bank failures happening today against the backdrop of the foreclosure crisis. This has led to FDIC

The ANB Bank of Arkansas suddenly started granting high risky loans to construction developers. It was a jump of 300% from 2004 to 2005 containing half of all the loans it sanctioned. Then things went awry and the bank was plunged into losses. Its delinquency numbers were double that of the national average. But instead of plugging the hole the banks top regulator, the Office of the Comptroller of the Currency (OCC) encouraged the activities of the bank management by rewarding it with the best safety rating!

Debra Jackson the CEO of ANB said “You can get into a comfort zone by looking at the rating from our primary regulator that says everything’s okay.” Jackson has been working with the bank from 1994 when the bank started until it collapsed in 2005. It was seized by FDIC in 2008 May. The Inspector General reported, “If OCC had more aggressively and sooner. ANB might have acted earlier or differently to address its problems.”

There are many other instances of the failure of regulators compelling FDIC to step in. In a minimum of six banks that have been checked by the Inspector General of the Treasury and in seven others looked over by the Inspector General of FDIC the regulators were either inefficient or intentionally appeared to be so as the management pulled down the banks in an orgy of destruction. The Inspector General of the Federal Reserve is conducting its own survey on a minimum of three entities that had collapsed under its regulation.

In two extreme cases the Treasury found “inappropriate” back logging of capital that led to “misleading financial reporting.” The Office of Thrift Supervision cooperated with the management to depict capital that was more than what they had in their books. Thus they were made to look more financially solid than what they really were, reported the Treasury. This permitted the banks to continue with their daily business even though the drop in capital levels would have reduced their rating and cut off their availability to some of the deposits.

Phillip Wellons of Harvard Law School and former director of a programme dealing with international finance said, “Why assume that such supervisory failures apply only to these banks?” We do not know what would be found if the regulatory curtain were lifted on all banks.”