FDIC’s Unusual Order: Sell Yourself or Liquidate
Federal regulators have issued an unusual order to a small bank in Utah, forcing it to either sell itself or liquidate. The Federal Deposit Insurance Corp. (FDIC) made this decision public last week, taking a last-ditch effort to avoid placing the bank into receivership. This order is reminiscent of the sell-or-merge directives used after the 2008 financial crash.
The Unprecedented FDIC Order
The order given to Liberty Bank in Salt Lake City, one of the smallest banks in the country with just $13 million of assets, came as a surprise to industry lawyers and regulatory experts. The FDIC cited various issues with the bank, including bookkeeping problems, the need for a property appraisal, and determining ownership of a parking lot. The public nature of this order is unusual and raises the risk of depositors withdrawing their money.
“It’s unusual,” says Bob Hartheimer, a senior advisor at Klaros Group and former FDIC official. Hartheimer suggests that the bank likely received the same message privately prior to the public order. Liberty Bank President and CEO Kendall Phillips stated that the bank is cooperating with regulators and actively seeking a sale or merger to resolve its issues.
FDIC’s Goal to Avoid Receivership
For the FDIC, the alternative to a forced sale or liquidation would be placing the bank into receivership. This would negatively impact the Deposit Insurance Fund. Last year, the fund took hits due to the failures of several banks, including the tech-heavy Silicon Valley Bank and the crypto-dabbling Signature Bank. The FDIC aims to avoid such situations by requiring Liberty Bank to raise $1.25 million in capital within 90 days or merge with another bank. If unsuccessful, the bank will be forced to liquidate itself immediately.
Rare Use of the Term “Liquidate”
The FDIC’s consent order to Liberty Bank is notable for its use of the term “liquidate,” which rarely appears in public actions. Since 2000, the FDIC has only directed a bank to prepare liquidation plans on five occasions. While this may be uncommon, regulatory attorney Cliff Stanford suggests that it does not mean it is unprecedented.
Liberty Bank’s History of Troubles
Liberty Bank has had previous encounters with regulatory issues. In 2017, the FDIC penalized the bank for various problems, such as inadequate management and capital maintenance. In 2021, the FDIC flagged violations of consumer lending laws, including the Truth in Lending Act and the Community Reinvestment Act. Although the bank had found an acquirer in 2021, the deal fell through due to objections from consumer groups.
Frequently Asked Questions
What is the FDIC order?
The FDIC has issued an order to Liberty Bank in Utah, requiring it to sell itself or liquidate.
Why is this order unusual?
The public nature of the order is unusual, and it raises the risk of depositors withdrawing their funds.
What happens if the bank does not comply with the order?
If Liberty Bank fails to comply with the order, it will be forced to liquidate immediately.
Why is the FDIC taking this action?
The FDIC is aiming to avoid placing the bank into receivership, which would negatively impact the Deposit Insurance Fund.
Has Liberty Bank faced previous regulatory issues?
Yes, Liberty Bank has had encounters with regulatory problems in the past, including inadequate management and violations of consumer lending laws.
Is there a potential buyer for Liberty Bank?
The bank is actively seeking a sale or merger to resolve its issues, and it has hired financial and legal advisors for assistance.
Conclusion
The FDIC’s unusual order for Liberty Bank in Utah to sell itself or liquidate highlights the bank’s ongoing struggles and regulatory issues. The public nature of the order raises concerns among depositors, and the FDIC hopes to avoid placing the bank into receivership. Liberty Bank is actively seeking a resolution through a sale or merger, cooperating with regulators while working to comply with the FDIC order.
