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Community Bank and Financial Crisis

Community Bank and Financial Crisis. Carter Young & Chin Hwa Tan. Topic Overview. What is a Community bank? Systemic Risk Bank Failure. Community Bank. Strong relationship with the community Asset size less than $10 BILLION The primary source of lending for S mall businesses

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Community Bank and Financial Crisis

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  1. Community Bank and Financial Crisis Carter Young & Chin Hwa Tan

  2. Topic Overview • What is a Community bank? • Systemic Risk • Bank Failure

  3. Community Bank • Strong relationship with the community • Asset size less than $10 BILLION • The primary source of lending for • Small businesses • Farms • Bread-and-Butter banking • Deposits • Loans

  4. Systemic Risk • “The possibility that a triggering event, such as the failure of an individual firm, will seriously impair other firms or markets and harm the broader economy” • Community banks were too small to be considered “systemically important”

  5. Systemic Risk (cont.) • Interconnectedness • Dominos effect of bank failure • Correspondent banking • Benefit of using correspondent bank • Achieve economies of scale • Pool fed funds • Loan participation

  6. Systemic Risk (cont.) • Silverton Bank, GA • Closed by Office of the Comptroller of the Currency (OCC) • Federal Deposit Insurance Corporation named as receiver • TIB appointed as Operations Manager • Bad lending practice cause Silverton Bank’s • TIB manage to save all Silverton customers’ Fed Fund

  7. Bank Failure • 215 bank failures between January 25, 2008 and April 16th, 2010 • Only 7 Big banks fail • Balance Sheet • Asset • Loans • loan loss reserve • ASC ASC310-10-35-2 (allowance for doubtful accounts for their loan asset account) • Liability • deposits

  8. Bank Failure (cont.) • Reasons for banks failure • Lack of diversity in lending • Bad management and loan approval • Subprime mortgages • Prepaid Assessment • Not another special assessment • Purpose – Replenish FDIC’s Deposit Insurance Fund • prepay 3 years worth of deposit insurance premiums at the end of 2009 ($45 billion)

  9. Bank Failure (cont.) • Supervisory Capital Assessment Program (stress test) • Usage of capital • provides a cushion against the risk of failure • provides the funds for bank operations • promotes public confidence and reassures creditors • provides funds for banks to create new services • serves as a regulator of growth for banks

  10. Bank Failure (cont.) • Basel I • Tier 1 (core) capital • Tier 2 (supplemental) capital • Adequately capitalized bank should have • A ratio of Tier 1 capital to risk-weighted assets of at least 4% and • A ratio of total capital to total risk-weighted assets of at least 8%, • Basel II • Minimum capital requirements • Supervisory review • Greater public disclosure

  11. Questions & Answers

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