Downey Financial Seized as Bank Consolidation Continues

Downey Financial and two other banks were closed and hastily sold off to larger banks by the FDIC. This continues a trend of banks closing and being sold in deals brokered by the FDIC. It is the beginning of a massive consolidation in the banking sector.

Downey Financial, a $12.8 billion asset bank and PFF Bank & Trust, a $3.7 billion asset bank were both taken over by the FDIC and then quickly given to US Bankcorp.  Deposit holders will not lose any money although it is expected that the FDIC will have to spend about $2 billion in the deal.  A smaller third bank, Community Bank of Loganville, Georgia, was also closed and its $611.4 million of deposits taken over by Bank of Essex in Tappahannock, Virginia.

These closing represent the 21st, 22nd, and 23rd closings this year.  Downey Financial is the second largest closing this year, trailing only the $30 billion failure of Indymac last summer.

As economic conditions deteriorate, we can expect bank failures to accelerate. 

From Bloomberg:

“The restructuring or consolidation of the U.S. banking industry has probably just begun,” said Neil Katkov, senior vice president of Celent, a Boston-based financial research firm. “There’s a whole world of potential mergers and acquisitions that will continue to emerge like these one."

He continued:  “We’ll probably see more regional and community banks get into trouble."

If the pace of these closings accelerate, the FDIC will deplete the $40 billion it currently has set aside to insure bank failures.

Although it is highly unlikely the government would allow the FDIC to become insolvent, there are several things you can do to protect yourself:

1. Don't just rely on FDIC insurance.  Look at a bank's Bauer rating (meaure of its safety and soundness) to determine its health.  BestCashCow also provides health and safety information on all banks issuing savings accounts and certificates of deposits.

2. Look at a bank's stock price.  The stock price is a forward looking measure of what the market thinks of a bank's stability and future prospects.

3. Make sure your money is FDIC insured.  Limits vary depending on whether you have a joint account and POD (Payable Upon Death) beneficiaries.  In many cases a joint account can receive $250,000 in coverage per person and an additional $250,000 in coverage for each POD beneificiary.

4. Be conscious of the timeperiod and term of your deposit.  The increase to $250,000 FDIC insurance is only in effect until December 31, 2009 at which point it reverts to $100,000.  If you open a CD above $100,000 it may be covered now, but the amount in excess of $100,000 won't be on January 1, 2010.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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  • ktexas

    November 24, 2008

    Shouldn't WaMu's closure be considered? So Downey would be the 3rd largest failure this year.

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