Regulators shut Illinois bank

[June 06, 2009]  WASHINGTON (AP) -- Regulators on Friday shut down Bank of Lincolnwood, a small bank in Illinois, marking the 37th failure this year of a federally insured bank. More are expected to succumb amid the pressures of the weak economy and mounting loan defaults.

The Federal Deposit Insurance Corp. was appointed receiver of the failed bank, based in Lincolnwood, Ill., which had about $214 million in assets and $202 million in deposits as of May 26.

All of Bank of Lincolnwood's deposits will be assumed by Republic Bank of Chicago, based in Oak Brook, Ill., which also agreed to buy about $162 million of the bank's assets; the FDIC will retain the rest for eventual sale. Bank of Lincolnwood's two offices will reopen on Saturday as branches of Republic Bank of Chicago.

The FDIC estimates that the cost to the deposit insurance fund from the failure of Bank of Lincolnwood will be $83 million.

It was the third bank in Illinois to be closed by regulators in recent weeks. The previous two, shuttered on May 22, were Strategic Capital Bank, based in Champaign, and Citizens National Bank, based in Macomb. Their resolutions are expected to cost the insurance fund about $173 million and $106 million, respectively.

As the economy has soured, with unemployment rising, home prices tumbling and loan defaults soaring, bank failures have cascaded and sapped billions out of the deposit insurance fund. It now stands at its lowest level since 1993, $13 billion as of the first quarter.

While the pounding from losses on home mortgages may be nearing an end, delinquencies on commercial real estate loans remain a hot spot of potential trouble, FDIC officials say. If the recession deepens, defaults on the high-risk loans could spike. Many regional banks hold large numbers of them.

The number of banks on the FDIC's list of problem institutions leaped to 305 in the first quarter - the highest number since 1994 during the savings and loan crisis - from 252 in the fourth quarter. The combined assets of those banks rose to $220 billion from $159 billion.

The 37 insitutions closed this year compare with 25 in all of 2008 and three in 2007.

The FDIC expects U.S. bank failures to cost the deposit insurance fund around $70 billion through 2013.

The agency recently adopted a new system of emergency fees paid by U.S. financial institutions that shifts more of the burden to bigger banks to help replenish the insurance fund. The move by the agency cut by about two-thirds the amount of special fees to be levied on banks and thrifts compared with an earlier plan, which had prompted a wave of protests by small and community banks.

The new system is intended to raise about $5.6 billion. Additional emergency assessments could come later in the year, the FDIC has said.

Congress has more than tripled the amount the FDIC may borrow from the Treasury Department if needed to restore the insurance fund, to $100 billion from $30 billion.

Government "stress tests" of the 19 biggest U.S. banks last month showed that 10 of them had to raise a total of $75 billion in new capital to withstand possible future losses. Of those, Bank of America Corp. needed the most by far - $33.9 billion. Wells Fargo & Co. needs $13.7 billion, auto lender GMAC LLC $11.5 billion, Citigroup Inc. $5.5 billion and Morgan Stanley $1.8 billion.

The tests were a key part of the Obama administration's plan to fortify the financial system. The banks were given until Monday to submit their plans for raising capital and have it approved by their regulators. If they can't raise the money on their own, the government said it will dip further into its bailout fund.

The closing last month of struggling Florida thrift BankUnited FSB is expected to cost the insurance fund $4.9 billion, the second-largest hit since the financial crisis began. The costliest was the July 2008 seizure of big California lender IndyMac Bank, on which the insurance fund is estimated to have lost $10.7 billion.

The largest U.S. bank failure ever also came last year: Seattle-based thrift Washington Mutual Inc. fell in September, with about $307 billion in assets. It was acquired by JPMorgan Chase & Co. for $1.9 billion in a deal brokered by the FDIC.

[Associated Press; By MARCY GORDON]

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