The FDIC updated its website late last week to reflect developments in the professional liability lawsuits the agency filed in the wake of the wave of bank failures that followed the global financial crisis. The unmistakable impression from the agency’s update is that the FDIC’s failed bank litigation is winding down and in its final stages. At the same time, however, a different page on the agency’s website arguably conveys a different message. The agency’s website’s failed bank list shows that though the financial crisis is well in the past, there have been a noticeable number of bank failures this year, many of them involving sizeable banks — a development that is worth considering and keeping an eye on.
First with respect to the FDIC’s professional liability litigation, the agency updated the litigation page on its website on June 16, 2017. Among other things, the updated website shows that it has now been over a year since the agency has filed a new failed bank lawsuit. The page also shows that of the 109 D&O lawsuits the agency filed between 2010 and 2016, three have resulted in “favorable jury verdicts” (that is, favorable to the FDIC) and 101 have been settled – meaning that only five of the failed bank lawsuits remain pending. The page does also show that in 2017, the agency has authorized actions against 3 director and officer defendants, after authorizing actions against 6 D&O defendants in 2016 (by comparison to a total of 1,216 authorized D&O defendants since 2009). My detailed review of the failed bank litigation can be found here.
The absence of new lawsuit filings in over a year and the resolution of almost all of the pending litigation clearly suggest that the failed bank litigation is winding down. At the same time, however, and as reflected on the FDIC’s failed bank list on the agency’s website, there is a troubling message that banks are continuing to fail.
As noted here, there have already been a total of six bank failures so far in 2017, compared to five bank closures during all of 2016 (which, according to the agency, is “the smallest number of bank failures in a year since three FDIC-insured banks failed in 2007”).
As noted in recent article on Slate entitled “Banks Are Failing Again in America” (here), not only are banks failing in 2017, but the ones that are failing are larger than the ones that failed in the most recent years. The banks that failed in 2016 were, in the words of the Slate article, “truly marginal.” The five banks that failed in 2016 had only $277 million in assets between them. By contrast, several of the banks that have failed in 2017 are quite sizeable. First NBC Bank of New Orleans, which failed on April 28, 2017, had assets of $4.7 billion. Guaranty Bank of Milwaukee, which failed on May 5, 2017, has $1 billion in assets. The FDIC’s overview of the 2017 bank failures can be found here.
In the wake of the First NBC Bank collapse, the possibility of claims against the failed bank’s former directors and officers is already being circulated. In the months leading up to the bank’s failure, shareholders had already filed a securities class action lawsuit against the bank and certain of its directors and officers. Both developments are reminders that troubled banks attract claims.
Why are banks failing at elevated rates now? The U.S. economy is rolling along quite well and overall banks are reporting positive results. The fact is that the recovery from the financial crisis remains uneven, and there are still stresses in different parts of the economy – the oil and gas industry, for example, is continuing to struggle with low commodity prices and generally high debt levels. The First NBC Bank in New Orleans, for example, has significant exposure to the oil and gas industry. A rising interest rate environment is also having an impact as well, as the Fed eases in interest rate increases after years of ultralow rates. A recent Forbes article (here) attributes a number of the 2017 bank failures to the rising interest rates.
There is nothing here to suggest that we are about to see another wave of bank failures or that failure is a significant threat to a significant part of the banking industry. Indeed, the Forbes article to which I linked above takes the position that elevated levels of bank failures is unlikely to be a significant issue going forward. The message here is a different one – that is, that though we are well past the financial crisis, there are still borrowers and businesses that are continuing to struggle in the current economy.
The Slate article suggests ominously that “there’s a lot more failure where these failures came from. “ I am not so sure of that; even though there have already been more bank failures this year than last year, it is possible to try to read too much into what is still by any measure a small data set of YTD bank failures. Six bank failures out of a national pool of 5,913 remaining banks (as of Dec. 31, 2016) may or may not represent a significant trend.
While the significance of the bank failures so far this year remains to be seen, the fact that banks of significant size are failing even in the current relatively robust economy should prompt concern for D&O insurance underwriters specializing in financial institutions. Since a price spike at the peak of the financial crisis, pricing for D&O insurance for banks has dropped significantly. The market for D&O insurance for banks is actively competitive. The most recent bank failures serve as a reminder that notwithstanding the overall economic recovery and without regard to competitive pressures, D&O insurance underwriters can’t take their eyes off of underwriting fundamentals. Even in the current economy, there are significant risks out there.
There are D&O insurance lessons for the bank themselves, as well. The directors and officers of the banks that failed during the bank failure wave certainly confirmed how important their bank’s D&O insurance was. The recent spate of bank failures is a reminder that risks remain even in a recovered economy and accordingly it remains important for banks to ensure that they have in place and maintain an effective D&O insurance program. Healthier banks are likely to continue to enjoy the benefits of availability of insurance capacity at lower prices and with attractive terms and conditions, but the less healthy banks could well see greater scrutiny, even with the current abundance of insurance capacity.
The bottom line is that while we the economy is humming along, it would be dangerous to get complacent. There is still a lot of risk lurking around out there.