FDIC to Financial Institutions: “Don’t Gamble With Government-Guaranteed Funds!”

March 5, 2009 at 4:55 pm Leave a comment

The FDIC continues to increase its scrutiny of “weakened” financial institutions. The latest restrictions, issued March 3, 2009, are contained in a financial institution guidance letter (the Letter) that addresses FDIC concerns over the use of “volatile or special” funding by financial institutions that are in a “weakened condition.” The Letter also reflects increasing FDIC concern over the possible misuse of FDIC-sponsored liquidity programs, such as the Temporary Liquidity Guarantee Program. Although directed primarily at financial institutions with a CAMELS rating of 3, 4 or 5, the Letter also contains instructions for 1- and 2-rated institutions. Read a copy of the entire Letter. Here’s an overview of some of the Letter’s specifics:

  • The Letter reminds financial institutions that received a CAMELS rating of 3, 4 or 5 in their most recent exam that any plans to “aggressively grow assets” or to “significantly shift balance sheet composition to riskier asset classes” may constitute unsafe and unsound banking practices.
    • The Letter warns that FDIC scrutiny of such activities will be even greater if such activities are funded by brokered deposits, stating, “deposits or other funds that are newly insured or guaranteed pursuant to temporary FDIC programs, secured borrowings or other volatile wholesale funding sources.
  • “Instead of increasing exposure to risk, 3-, 4- and 5-rated financial institutions are expected to implement a plan to stabilize or reduce their risk exposure and to limit their current growth.
    • According to the Letter, the plan should not include the use of volatile liabilities or temporarily expanded FDIC insurance or liability guarantees to fund aggressive asset growth or otherwise materially increase the institution’s risk profile.
    • The Letter reiterates, however, that “prudent lending practices” do not increase an institution’s risk profile.
  • Even if an institution received a CAMELS rating of 1 or 2 in its most recent exam, the Letter warns that aggressive growth strategies or reliance on non-core liabilities to fund riskier asset classes may result in (1) heightened off-site monitoring, (2) more extensive on-site examinations or, in specific circumstances, (3) increased deposit insurance premiums.

The Letter addresses two of the FDIC’s current concerns. First, the FDIC is continually concerned that weak financial institutions are implementing growth strategies that add additional risk exposures. Second, the FDIC is attempting to prevent institution’s from increasing their risk exposure at the expense of FDIC liquidity programs. This type of scrutiny will only increase throughout 2009.

Entry filed under: FDIC.

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