What Happens If More Banks Fail?

CHARLOTTE, N.C. (AP) -- The government's seizure of IndyMac Bank raises concerns for many consumers about whether their banks might be next.

While it is unlikely the nation will see thousands of banks fail as they did during the savings and loan industry collapse in the late 1980s and early '90s, analysts predict there will be more battered financial institutions that are unable to survive in today's marketplace.

"IndyMac's failure is certainly a broader issue," said Eva Weber, an analyst at Aite Group, a financial services research firm. "Those who are trenched in more risky business, who are feeling more heavy losses, may be at more risk."

On Friday, the Office of Thrift Supervision transferred control of the California lender to the Federal Deposit Insurance Corp. because it did not think IndyMac could meet its depositors' demands. By Monday, the bank reopened as IndyMac Federal Bank, FSB, and customers whose deposits were insured by the FDIC were able to access full banking services, including online banking, during normal business hours.

IndyMac, like many of the nation's banks, was facing pressures of tighter credit, tumbling home prices and rising foreclosures. In recent weeks it had experienced a run on the bank, with depositors pulling out $100 million a day.

Here are some questions and answers about the government's role when a bank fails and if other banks are at risk:

Q: Why did the government seize IndyMac's assets?

A: Regulators closed IndyMac after customers began a run on the lender following the June 26 release of a letter by Sen. Charles Schumer, D-N.Y., urging several bank regulatory agencies that they take steps to prevent IndyMac's collapse. In the 11 days that followed the letter's release, depositors took out more than $1.3 billion, regulators said.

In a statement Friday, Schumer said IndyMac's failure was due to long-standing practices by the bank, not recent events. And on Sunday, he noted that IndyMac was more heavily involved in originating riskier mortgages than traditional community and regional banks, which weakened the bank's finances.

The financial institution spent the last two weeks trying to reassure customers that it was not near default, including announcing that it had stopped accepting new loan submissions and planned to slash 3,800 jobs, or more than half of its work force.

Q: What happens when the government takes over a bank?

A: In such a scenario, called a conservatorship, a bank's regulator takes control of the company and oversees their operations. The move is to maximize the value of the institution for a future sale and to maintain banking services in the communities formerly served by the bank.

Q: Is my bank at risk?

A: John Bovenzi, the former chief operating officer of the FDIC put in charge of IndyMac, reassured consumers late Sunday that bank failures have been rare in the past, and that if more banks do fail, the government has enough in reserve. According to regulatory policy, there is no advance notice given to the public before a bank's assets are seized by federal regulators.

"I think the important point to make is that, historically, only a very small percentage of the banks on our problem banks list ever failed," Bovenzi said on CNN. "While there are 90 banks on the list, there would be no expectation that 90 of those banks would fail."

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