Last week, First Priority Bank in Bradenton, Fla., became the eighth American bank to fail this year. Every single one of these institutions went under on a Friday. Why do banks always go bust on Fridays?
So the government has a full weekend to reopen them under new management. If the banking business didn’t return to normal at the earliest opportunity, the specter of agitated customers might erode public confidence in the banking system, triggering a wider panic. So regulators close banks at the end of the day on Friday to take advantage of the regularly scheduled days off. In that time, officials from the Federal Deposit Insurance Corp.—the agency in charge of supervising the actual takeover—can settle a failed bank’s accounts and carve out assets to liquidate later, thereby easing the transition to a new owner. And if there is no new owner—i.e., if no healthy bank has stepped up to purchase the failed one—then the FDIC can use the weekend to write checks to customers for the total amount of their insured deposits. (The FDIC can also create a temporary bridge bank, as it did last month with IndyMac, to take over the failed bank’s operations.)
Preparations for a bank failure can begin long before that final weekend, however. A troubled institution is usuallyput on notice months earlier by the agency that chartered it. (In the case of First Priority, that’s the Florida Office of Financial Regulation.) If it can’t manage to turn itself around in a timely fashion, the chartering agency may decide to close it. Regulators wait until the last minute to make the formal announcement, though, to keep the failed bank’s employees and customers as calm as possible for as long as possible. (Sometimes the FDIC doesn’t get much advance warning at all, particularly when fraud is involved and the chartering agency must take swift action. When the First National Bank of Keystone closed in 1999, the FDIC got wind of it only the day before.)
If the FDIC has enough lead time, it can obtain the bank’s financial records in advance and start looking for a potential buyer. Regulators select candidates and quietly notify them, in very general terms, that a bank matching their criteria is about to go on sale. Interested parties sign confidentiality agreements and then gain access to a secure FDIC Web site with more specific information. Bids are usually due by noon on the Tuesday prior to a planned Friday closing, and the winning bidder is notified by the end of the day. The acquiring bank must then quickly assemble its own team to help with the weekend merger.
On the Friday of a typical takeover, the FDIC arrives on-site with a large team to manage the transition. (When a large bank fails, this might include upward of 100 people.) The team has two main priorities. First, it must figure out which customers’ deposits are insured and which are not. This can be a tangle, since customers can sock away money in a variety of accounts to ensure that their deposits fall under FDIC-insured limits. The second priority is getting the bank ready to open under new ownership by Monday. That involves discarding any material with the old bank’s name on it—like posters, cashiers’ checks, and marquee signs—and putting the new bank’s paperwork, advertisements, and employees in place. Specialists from other departments, such as facilities, human resources, IT, public relations, and accounting, round out the FDIC’s team. Officials once even hired a hypnotist to help a bank employee remember a vault code.
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Explainer thanks David Barr and Robert Schoppe of the FDIC.