Community Bank and Financial Crisis Carter Young & Chin Hwa Tan

Topic Overview  What is a Community bank?  Systemic Risk  Bank Failure

Community Bank  Strong relationship with the community  Asset size less than $10 BILLION  The primary source of lending for  Small businesses  Farms  Bread-and-Butter banking  Deposits  Loans

Systemic Risk  “The possibility that a triggering event, such as the failure of an individual firm, will seriously impair other firms or markets and harm the broader economy”  Community banks were too small to be considered “systemically important”

Systemic Risk (cont.)  Interconnectedness  Dominos effect of bank failure  Correspondent banking  Benefit of using correspondent bank  Achieve economies of scale  Pool fed funds  Loan participation

Systemic Risk (cont.)  Silverton Bank, GA  Closed by Office of the Comptroller of the Currency (OCC)  Federal Deposit Insurance Corporation named as receiver  TIB appointed as Operations Manager  Bad lending practice cause Silverton Bank’s  TIB manage to save all Silverton customers’ Fed Fund

Bank Failure  215 bank failures between January 25, 2008 and April 16 th, 2010  Only 7 Big banks fail  Balance Sheet  Asset  Loans  loan loss reserve  ASC ASC (allowance for doubtful accounts for their loan asset account)  Liability  deposits

Bank Failure (cont.)  Reasons for banks failure  Lack of diversity in lending  Bad management and loan approval  Subprime mortgages  Prepaid Assessment  Not another special assessment  Purpose – Replenish FDIC’s Deposit Insurance Fund  prepay 3 years worth of deposit insurance premiums at the end of 2009 (  $45 billion)

Bank Failure (cont.)  Supervisory Capital Assessment Program (stress test)  Usage of capital  provides a cushion against the risk of failure  provides the funds for bank operations  promotes public confidence and reassures creditors  provides funds for banks to create new services  serves as a regulator of growth for banks

Bank Failure (cont.)  Basel I  Tier 1 (core) capital  Tier 2 ( supplemental) capital  Adequately capitalized bank should have  A ratio of Tier 1 capital to risk-weighted assets of at least 4% and  A ratio of total capital to total risk-weighted assets of at least 8%,  Basel II  Minimum capital requirements  Supervisory review  Greater public disclosure

Questions & Answers