FDIC OIG confirms board oversight and liquidity issues led to a bank’s failure

Bank Regulatory OIG FDIC Iowa Liquidity

On March 25, the Office for the Inspector General (OIG) for the FDIC issued a report on a 2023 bank failure, finding that the bank’s failure netted a $14.8 million estimated loss to the Deposit Insurance Fund (“DIF”), but that the failure did not warrant a formal evaluation of the FDIC’s supervision of the failed bank in the form of an In-Depth Review. As defined by the FDIC, the DIF was created to ensure deposits, protect depositors, and resolve failed banks. Any DIF loss incurred under $50 million would require the OIG to review and determine if any unusual circumstances exist that may warrant an In-Depth Review; the OIG did not find any unusual circumstances here.

In November 2023, the FDIC was appointed as a receiver of a bank after its closure by the Iowa Division of Banking. The OIG noted that the bank failed after “significant deterioration” of the bank’s loan portfolio and operating losses stressed its liquidity as a result of bank board issues and management lax lending practices, as well as the failure to properly administer large commercial trucking relationships.

While conducting the bank review, the OIG considered four factors. First, the OIG considered the magnitude of the DIF loss in relation to the total assets of the failed bank. The OIG found the relative loss was 23 percent (noted as consistent in the last five years). Second, the OIG reviewed how effective the FDIC’s supervision addressed the issues. The OIG found the FDIC’s supervision “identified and effectively addressed” the issues that led to the bank’s failure. Third, the OIG considered any indicators of fraudulent activities that contributed to the DIF loss. The OIG found that while the examiners identified conflicts of interest in bank loans, they did not “significantly contribute” to the DIF loss. Last and fourth, the OIG reviewed any other relevant conditions contributing to the bank’s failure and found none.