Bank regulators should have acted sooner on Advanta, watchdog says

Introduction

Federal and state banking regulators should have raised questions sooner about the risky credit card securitization business of Advanta Bank Corp., which failed in March costing the federal bank insurance fund $459 million, a new watchdog report says.

Utah-based Advanta, which had $1.1 billion in assets when it collapsed, was created in 1991 as an industrial bank without any branches. Virtually all of its business was issuing credit cards to small businesses and business professionals, then securitizing the card debt.

Advanta failed because its board did not have practices in place to manage “the risks associated with the bank being a monoline small business credit card bank, and engaging in significant securitization activity,” the inspector general for the Federal Deposit Insurance Corp. said. As the U.S. economy deteriorated in 2008 and 2009, Advanta’s credit card delinquencies and charge-offs rose rapidly, which also hurt its securitizations, the watchdog said.

In late 2008, Advanta boosted interest rates on its credit cards as high as 37 percent to prod customers to pay off their accounts. The bank’s problems spiraled out of control six months later when it was forced to cancel credit card charging privileges for all cardholders to prevent a rapid rise in receivables.

“In hindsight, earlier and greater supervisory emphasis or concern could have been expressed regarding the failure of the bank’s capital allocation model and contingency funding plans to incorporate more extreme stress scenarios,” the watchdog said.

FAST FACT: Until June 30, 2009, Advanta was considered “well capitalized,” which is the top ranking on the FDIC’s scale of bank capitalization. When its rating slipped, the bank prepared three separate plans to rebuild its capital levels and regulators rejected all of them. By December, Advanta had tumbled to “critically undercapitalized,” the FDIC’s lowest ranking.

Other new watchdog reports released by the Government Accountability Office (GAO), various federal Offices of Inspector General (OIG), and other government entities:

FINANCE

• Florida’s Marco Community Bank failed because its commercial real estate portfolio grew too quickly, it had frequent management turnover, and it relied on capital injections from its holding company. Another factor in the bank’s collapse, which will cost the FDIC insurance fund $36.9 million, was the Atlanta Fed’s failure to examine the bank frequently because it was a new institution (OIG).

• The now-ended $700 billion Troubled Asset Relief Program that bailed out many U.S. banks will cost less than 1 percent of GDP, less than the 2.4 percent of GDP spent to clean up the U.S. savings and loan crisis two decades ago (Treasury Dept).

• Georgia-based Appalachian Community Bank, which had $1 billion in assets when it collapsed in April, will cost the FDIC insurance fund $420 million. Bank examiners should have taken a “more critical supervisory assessment of management and asset quality” in 2006-07 before the bank’s capital was eroded by inadequate underwriting and credit administration (OIG).

MISC.

• Treasury Dept’s inspector general agrees to request from Republican senators to launch investigation into whether Obama administration officials illegally disclosed confidential taxpayer information about Koch Industries Inc., a privately-owned oil company whose owners support various conservative causes (OIG).