GAO Report Examines Post-Recession Bank Collapses

From 2008 through 2011, 414 banks failed across the nation, resulting in estimated costs to the Deposit Insurance Fund (DIF) of about $42.8 billion, according to a recent ""report"":http://www.gao.gov/assets/660/651155.pdf by the ""Government Accountability Office (GOA)."":http://www.gao.gov/

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Thus far, the DIF has doled out about $16.2 billion in shared loss payments, and it is expected to pay about $26.6 billion more.

In order to minimize losses, the FDIC entered shared loss agreements for 281 out of the total 414 failed institutions. In a shared loss agreement, the FDIC agrees to incur part of the losses when another bank agrees to purchase the failed bank.

GOA found that in many cases the purchasing institutions would not have been willing to absorb the shuttered banks without a shared loss agreement with the FDIC.

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The FDIC estimates liquidating all failed banks' assets would cost the DIF $40 billion more than the current costs through the shared loss agreements.

Additionally, the FDIC suggests shared loss agreements ensure ""reductions in immediate cash needs, less disruption to failed bank customers, and the movement of assets quickly into the private sector,"" according to GOA.

When examining the cause of bank failures from 2008 through 2011, GOA found banks with less than $1 billion in assets were especially vulnerable to commercial real estate losses.

GOA also found instances of ""nontraditional, riskier funding sources"" and ""weak underwriting and credit administration practices"" in many failed banks.

Both the Treasury and the Financial Stability Forum's Working Group on Loss Provisioning suggest ""earlier recognition of loan losses could have potentially lessened the impact of the crisis,"" according to GAO's report.

In response to this line of thinking, the Financial Accounting Standards Board issued a proposal for a forward-looking loan loss provisioning model.

In 10 states, 10 or more commercial bank or thrifts failed during the four-year period. While those states represent geographically diverse areas, they also tend to cluster in regions. For example, the West and Pacific Northwest have a group of four states (California, Washington, Arizona, and Nevada) with 10 or more failures, as does the area near the Great Lakes (Minnesota, Illinois, Michigan, and Missouri).