19 October 2009

FDIC Too Patient?

"The FDIC’s Office of Inspector General analyzed 23 lenders taken over by regulators from August 2008 to March and found that for 20, the agency’s examiners didn’t identify the issue early enough or should have taken stronger supervisory action after recognizing the banks had dangerously high levels of the loans before they failed. ...

“It’s often we’ll see in our reports that the FDIC detected problems in the bank in a timely fashion, but in some cases forceful corrective action wasn’t required by the FDIC to be taken quickly enough,” Jon Rymer, the FDIC’s inspector general, said in a telephone interview." . . .

This is recurring theme. The examiners in the field, for both the FDIC and the Fed, recognized problems fairly early, but the agencies failed to take aggressive action.

From here.

The good news is that something as simple as a new policy regarding how soon the FDIC's existing powers are used could materially reduce bank failures and FDIC losses.

Probably the hardest issue, which we see over and over again in this Financial Crisis and past instances of regulatory failure, is how to avoid complacency. How do you get regulators to put the heat on when the economy is "about due" for trouble after a prolonged, economic disaster free interval?

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