Good Essay About Commercial Banks

Section 38(k) of the Federal Deposit Insurance Act (FDI Act) requires the Inspector General of the Federal banking agency to make reports on Deposit Insurance Funds when they incur material loss with respect to an insured deposit body. The report is made to the agency reviewing the regulation of the institution. The report explains why the institution’s problems resulted in the material loss. The agency, therefore, makes a recommendation for preventing future occurrence of any such loss. In the previous year, four banks were closed in Tennessee under the similar provisions of the FDI Act. Three of the banks include Vantage Point Bank, The Bank of Union and Tennessee Commerce Bank. This essay provides an analysis of the cause of failure of these banks. The analysis gives the recommendation on whether the banks should have been closed or the agency would have taken an initiative of salvaging the banks.
Vantage Point Bank was a financial institution based in Pennsylvania. According to the report, the bank was found out to have engaged in several flaws that resulted in its closure. The bank failed primarily because the Board of Directors and the management failed to manage efficiently the risks were related to the bank’s rapid expansion of its mortgage banking operation. Furthermore, the bank had not achieved pre- tax profit on operations even after three years of business as indicated on the projected business plan. The recurring pre-tax losses reported by the bank since its inception was due to the high overhead expenses and lower than expected interest revenue from the traditional banking services. In addition, the bank at that time was in the struggle of generating revenue from its operations of projected financial services. Furthermore, the report revealed that Vantage Point Bank capital was unsatisfactory, and the bank’s management had limited success in raising additional capital due to the unfavorable economic conditions that were prevailing at that time. The inability to raise additional capital affected the bank’s ability to grow in its balance sheet and generate revenue from its traditional financial services (Office of Inspector General 3).
Second in the list of the closed banks was The Bank of Union. The bank’s primary cause of failure was due to the management inability effectively to manage the risks associated with the aggressive growth and concentrations in C& I and agricultural loans. The lending functions of the bank lacked adequate controls and sufficient loan officers effectively to manage the growth and the complexity of the loan portfolio. In addition, Bank of Union lacked an adequate loan review functions and credit rating services within its operative system. According to the audit committee report, the bank extended, deferred and reviewed loans without fully accessing the customers’ ability to repay the loan. In general, the board of BOU was not adequately engaged in overseeing the bank’s lending strategies and practices which contributed to its ultimate failure. In the same year, the first state bank, the then Georgia-based bank was closed. The closure of the bank was on similar grounds as those of the Bank of Union. The management and board failed effectively to manage the risks associated with loans advanced to its customers. It further lacked sensible loan limits, a factor that contributed to its failure and ultimate closure (Office of Inspector General 4).

Works Cited

Office of Inspector General. "In-Depth Review of the Failure of Vantage Point Bank, Horsham, Pennsylvania." N.p., 31 Mar. 2015. Web. <http://www.fdicoig.gov/reports15/15-003AUD.pdf>.
Office of Inspector General. "Material Loss Review of The Bank of Union, El Reno, Oklahoma." N.p., 30 Sept. 2014. Web. <http://www.fdicoig.gov/reports14/14-010AUD.pdf>.