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U.S. regulators
seized three Puerto Rican banks on Friday and sold their deposits to
other banks, costing the Federal Deposit Insurance Corp (FDIC)
insurance fund $5.3 billion — one of the largest hits in the banking
crisis.

The FDIC said
regulators had seized the banking operations of EuroBancshares Inc,
R&G Financial Corp and W Holding Co in a move that will consolidate
the struggling area’s financial sector.

By seizing and
selling the banks’ deposits to stronger banks, the FDIC said it saved
$3.5 billion over the cost of outright liquidation. A spokeswoman for
the FDIC said the agency received 18 bids from five bidders.

The seized banks in
Puerto Rico dwarfed in size the failures of four other banks also
announced Friday, bringing the number of failed U.S. lenders this year
to 64. The quartet of U.S. banks included CF Bancorp of Port Huron,
Michigan; Champion Bank of Creve Coeur, Missouri; BC National Banks of
Butler, Missouri; and Frontier Bank of Everett, Washington.

Figuring out what
to do with the weakest of Puerto Rico’s banks had been a thorny problem
for the FDIC, which expects to sink about $100 billion into shoring up
wobbly banks between 2009 and 2013.

An accounting
scandal weakened many of the island’s biggest banks beginning in 2005,
making it difficult for the FDIC to find local buyers strong enough for
the assets, people briefed on the matter said. But most buyers from
outside Puerto Rico were reluctant to gain exposure to an island with
16 percent unemployment that has been in recession since 2006.

The three banks
being shut down suffered from a surfeit of construction loans, and
other bad loans, a legacy of a housing boom on the island in the middle
part of the decade.

Oriental Bank and
Trust is assuming the deposits of Eurobank, Scotiabank de Puerto Rico
is assuming the deposits of R-G Premier Bank of Puerto Rico, and Banco
Popular of Puerto Rico is assuming the deposits of Westernbank Puerto
Rico, the FDIC said.

Scotiabank de
Puerto Rico is a unit of Canada’s Scotiabank, marking the third time in
recent weeks that the FDIC has sold failed lenders to Canadian banks.

In transactions
announced on Friday, the FDIC has seized lenders controlling about 20
percent of the banking assets on the island, and about a quarter of the
deposits.

Even after sorting out these deals, Puerto Rico is wrestling with difficult issues.

The local
government is spending less and boosting taxes, and many banks are
still wrestling with bad assets, so credit is still tight on the
island, said Sergio Marxuach, policy director at a Puerto Rican
economic think tank.

“If banks are not lending, and the government is not spending, it’s very hard for the economy to grow,” Marxuach said.

The Puerto Rican
government is forecasting 0.4 percent growth for the fiscal year
beginning July 1, but meeting that forecast may be tough, Marxuach said.

Emergency provisions

The Federal Reserve used emergency provisions to okay one of the transactions.

Banco Popular, the
largest of Puerto Rico’s banks by assets, had about 27.4 percent of the
area’s total insured deposits. After the acquisition of Westernbank, it
will have a 31.4 percent share. Typically the maximum for a state is 30
percent.

The Fed said, “the
anticompetitive effects of this proposal in the relevant markets are
clearly outweighed in the public interest by the probable effect of the
Banco Popular proposal in meeting the convenience and needs of the
communities to be served in Puerto Rico.”

FDIC Chairman
Sheila Bair said the cost of the failures to the FDIC’s insurance fund
was much less than initial estimates, due to the interest of acquirers.

All three of the
buyers are receiving the deposits of the banks they’ve acquired, and
are sharing losses with the government on some assets.

Deutsche Bank acted as the lead strategic adviser to the FDIC for these deals.

Some of the acquiring banks have problems of their own.

Nearly 10 percent
of Banco Popular’s loans were bad at the end of 2009. For Oriental, it
was around 9 percent. For most healthy banks, nonperforming loans make
up closer to 3 to 4 percent of the loan book.

Oriental is in
better shape than Popular, because loans make up less than 20 percent
of its overall assets. That means just 1.7 percent of the bank’s total
assets are nonperforming.

But it also means
the bank is putting most of its funds in securities like Treasuries
that — unlike loans — don’t fund growth on the island.

Banks that wanted
to bid had to prove they could raise capital first. Doral Financial
Corp, the fourth-largest bank on the island, raised $420 million of
capital contingent on its buying a bank from the FDIC, but it failed to
win.

Other banks that
failed on Friday include CF Bancorp, which was taken over by First
Michigan Bank; Champion Bank, taken over by Bankliberty; and BC
National Banks, taken over by Community First Bank; and Frontier Bank,
taken over by Union Bank, National Association, San Francisco.

Collectively, those four failures cost the FDIC’s insurance fund just over $2 billion.

Reuters