W. Va. bank failure not symptom of larger problem

Don’t expect the high-profile failure of First National Bank of Keystone, W.Va., to have a chilling effect on lending standards in Boulder County.

The failure of the Keystone-based bank could run the Federal Deposit Insurance Corp. (FDIC) $750 million to $850 million on one institution, says spokesman David Barr, who also notes the FDIC insurance fund has almost $30 billion available to cover bank loses.

But both Washington, D.C.-based regulators and bankers here say the recent bank failure – although a whopper – was an isolated incident that likely will prove in the end to be a result of fraud at the institution.

Even though the Keystone loss is not catastrophic for the insurance fund, Barr says, it is getting a lot of media play because it is the largest bank failure since the savings-and-loan crisis of the early 1990s.

“This will put it in the top 10 bank failures in our history,” Barr says, “which is fairly dubious for an institution that only has $1.1 billion in total assets.”

Barr also says he does not expect the Keystone bank failure to have a chilling affect on lending standards nationwide.

“This wasn’t really a lending-standards type of situation,” he says, adding that there was apparent fraud at the institution. Although underwriting standards have nothing to do with the failure of the institution, it is getting tied to lending because the bulk of the bank’s activity was in national markets for “subprime” or high-risk loans such as home-equity loans that exceed the actual prices of the homes. The subprime lending market collapsed last year, leaving the Keystone bank undercapitalized.

Charles Holmes, president of Colorado Business Bank of Boulder, says the banking industry has seen isolated incidents such as the Keystone failure and last year’s seizure of Boulder’s BestBank, but the industry hasn’t seen any widespread indication of that would indicate banks nationwide need to beef up their lending standards. Holmes also notes that even the Keystone bank failure does not represent a lot of money relative to the entire banking industry.

Holmes says 95 to 98 percent of banks do a good job of underwriting loans – and not only because the Office of the Comptroller of the Currency (OCC) has high standards for banks that it monitors manually. “I think most banks are pretty well managed,” he says.

Dave Gilman, president of The Bank in Boulder, agrees the West Virginia situation was an anomaly and not indicative of some really serious problem occurring in the banking industry. He says there’s no rapidly deteriorating credit problem nationwide or countywide, but that banks typically should be monitoring their credit – particularly in good times.

“That’s when problems can creep in and affect you at a later time,” Gilman says.

Comptroller of the Currency John Hawke Jr. said in November that community banks have made a strong commitment to risk management.

“What we see – encouragingly – is that community bankers are working hard to manage risk by educating their customers in better ways to manage theirs,” Hawke said in a speech to a risk-management conference sponsored by the Federal Financial Institutions Examination Council.

Hawke said risk management cannot be reduced to a tool or technique.

“It is a philosophy – a consciousness – that permeates every aspect of a bank’s operation,” he said.

on Facebook on LinkedIn