Bank Failures Cost $88 Billion

Using a secret enforcement tool, federal regulators in 2005 tried to limit the growth of Vineyard Bank, which was making commercial real estate loans in Southern California at almost double the rate of its peers.

The limit was a secret even to new regulators who took over the bank’s supervision in 2006 and never found out about it, according to a report prepared by the U.S. Treasury Department’s Office of Inspector General in July 2010. Vineyard, based in Corona, California, kept growing.

Its loans eventually soured and it failed in 2009, costing the fund that insures customers’ deposits an estimated $470 million. More than 400 such failures since 2007 have cost the fund, which is fed by banks and backstopped by taxpayers, an estimated $88 billion. That volume shows the need for more transparency in bank regulation, which is largely conducted in the dark, said Paul Atkins, a former Republican commissioner at the Securities and Exchange Commission.

“Transparency is vital,” said Atkins, the managing director at Patomak Partners LLC, a financial services consulting firm in Washington. “It helps make regulators accountable and helps taxpayers better judge what their liabilities might be.”

At least 1,400 times last year, federal examiners told a bank to fix a problem that could imperil its health, according to data from the three agencies that regulate banks. The agencies didn’t reveal the names of the troubled banks or the nature and severity of their concerns. That information is kept from investors, customers and the public unless securities laws force the bank itself to disclose.

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