Word: fdic
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...Tina Bochart no longer answers the telephone at State Bank of Dannebrog, Neb., with a cheery "Good morning. State Bank." Instead, she simply says, "FDIC." Bochart, a former assistant cashier, goes on to explain that State Bank, the only bank in town, has folded and been taken over by the Federal Deposit Insurance Corporation. "We're here," she says, "until things are cleaned up." The closing is a severe blow to Dannebrog, a farming village of 380, where the landmarks are groves of giant sycamore trees, a Lutheran church spire and the Silver Dollar Bar. Ray Johnson, owner of Johnson...
...while still facing "negative profits," Continental Illinois has repaid almost half of its loans from the FDIC and from other banks that helped cover the initial rush on deposits. And it actually seems possible that the FDIC will never have to purchase full equity in, or nationalize, the bank. So, why has the FDIC waited until now to replace management? What will be the effect of the management shakeup? Will this set a positive example for the industry...
First, the FDIC's move should be perceived largely as a signal to the industry that board directorships should not be awarded as honorariums. One of the great risks a capitalist society faces is the uncertain stability and credit worthiness of its banking institutions. By refraining from nationalizing the industry, unlike most European socialist countries, the United States is placing great faith in the management of individual banks. The FDIC must use the opportunity of Continental Illinois's brush with disaster to remind bank directors of the trust placed in them. (The FDIC had to wait until media focus shifted...
Second, the FDIC may have created an unnecessary void in Continental Illinois's management by replacing more than half of the bank's board. Finding qualified replacements may be difficult, at least in the short run. However, this should be a temporary situation, a justified cost for attempting to discipline the industry. In fact, look for retired managers of other large money center banks and former government officials to populate Continental Illinois' board in the future...
Finally, the FDIC's move may have a measurable impact on bank management in the future. While shareholders--and depositors--may soon forget the Continental Illinois fiasco, directors will probably adopt more conservative lending and management policies. The real threat of the collapse of one of the country's largest banks is, in itself, a significant and continual warning. The possibility of being held responsible for such a failure should make directors more active in bank management and more responsible for their actions both to shareholders and to depositors...