The Epidemic of Bank Failures - Case Study Example

The Epidemic of Bank Failures of The Epidemic of Bank Failures Introduction In January 20th 2012 the Eagle Savings Bank was closed down by the OCC with the FCIC being named as the receiver of the bank. The problem with this closure is that there was no notification issued to the public in advance of closing the financial institution. There were many problems within Eagle Savings Account which necessitated the Office of the Comptroller of the Currency to close it. The Federal Deposit Insurance Corporation which was the receiver of the company played an important role of assembling useful information concerning the relationship of the clients to the customer. The background checks by the acquiring company included certificates of deposit, business checking accounts, car loan, relationships with the institution and direct deposit to social security. This paper gives a critical analysis and discussion of the problems which led to the failure of the Eagle Savings Bank, the timelines and events during its absorption into another bank, issues of compensation and the implications of the company failure to the customers and its businesses Causes of Failure The American Eagle Savings Bank which is based in Boothwyn was facing financial problems for quite a long time. This is revealed by the E ratings which the company received prior to its falling. In fact the company faced three consecutive E rating for three quarters before it failed in January 1012 (Pierre, McDonald, Rudick, Winik, Weber & Handy, 2012). The capitalization of the bank were very poor and that was the case before it had to be closed. In addition, the equity which was being posted by the bank was very low. In the third quarter of 2011, it was recorded that the company had one of its lowest equity capital levels. The 54% loss in capital equity had grown from the previous 27% in the previous quarter. Additionally, the net loses that the company incurred throughout the years 2010 and 2011 also contributed to its eventual closure. Regardless of the fact that American Eagle Savings Bank was one of the oldest and high ranking institutions in the country, it had only $19.6 value of its assets in total (Schweikart & Doti, 2010). It would have gone unnoticed because it had numerous financial panics, depressions and world wars. The downfall of the bank in relation to its assets therefore motivated its closure. It is the Office of the Controller of the Currency that directed FDIC as a receiver which then sold the failing American Eagle Savings Bank to Capital Bank (Fair Disclosure, 2009). There was a troubled asset ration within American Eagle Saving Bank which is also one of the major contributors to its failure and sale to the Capital Bank. The sum of troubled assets was high. High sums in assets ratio means that a bank is under a significant financial stress due to loans which are not bringing returns as it was scheduled beforehand (Carlson, 2009). Nonetheless the scale of one bank is different when compared to other banks and as a result caution should be exercised when comparing other banks in order to ensure that the bank graphic which is used to evaluate companies realistically relates to the bank involved (Pierre, McDonald, Rudick, Winik, Weber & Handy, 2012). Timetable for Failure The failure of the company was put into the public domain when there was a press release by the FDIC about the closure of the banking institution. This occurred in July 2012. The media outlets, reporters and news groups and agencies were given contacts from where they would get more information. The information through the media which the public was thirsty for included the causes of the closure, any scandals involved and the implications that it would have for the shareholders, the management, investors and the banking industry in general. This was followed by the transfer of the accounts of the company to the acquiring company. Deposit accounts, in addition to the brokered deposits, were all transferred to Capital Bank. Then Rockville, MD, Capital Bank and National Association were all available with immediate effect. What followed is the reopening of a branch of American Eagle Bank within Capital Bank during the normal opening hours of the banking business. Later, checks within the American Eagles Savings Accounts that had been written before its closure were honored. The honoring of the checks was however achieved only if the checks were supported by a sufficient amount within the operating account. More significantly, the clients of the bank were assured that the transferred accounts were to be insured in relation to the accounts which were already held within the Credit Bank. The representatives within Credit Bank were finally put in place to answer client questions related to the transfer of their accounts and credit following the transfer of the American Eagle Bank’s assets into the Credit Bank. Compensation services The executives of the American Eagle Savings Bank were highly paid as compared to the other employees. This factor contributed to the increased expenditure within the company and the related challenges that it faced within the finance sector and business environment. The compensation schemes of the company were not objective but rather subjective which led to the increased expenditure in the payment to top executives. As a result the employee turnover increased. The implication of this was the reduced productivity of employees and the related reduction in the performance of the company. The combination of these compensational and motivational factors led to the employees having to seek better work opportunities and hence to the downturn of the company. The challenges in management were also experienced in the company regardless of the fact that these managers were well compensated. The failure of a company to achieve effective management heavily contributed to the eventual failure in its business activities (Pierre, McDonald, Rudick, Winik, Weber & Handy, 2012). Closing Terminology The Automated Teller Machine services were however maintained in the cross of the bank acquisition. This was aimed at diversifying the risks associated with the transfer of asserts so that the customers would not be forced to suffer unnecessary loss with time and their investment with the company which was being acquired. Wire services, safe deposit boxes and night deposit boxes were also maintained with checks guaranteed to be preceded as during normal business activities. The closing terminology also gave the customers a mandate of conducting the branch office for more information. Significantly though those who had loans with the American Eagle Savings Bank had to continue making payments as usual. Closing terminology related to leased equipment such as furniture and space had to be claimed not from the American Eagle Savings Bank but rather the Capital Bank. It is in this regard that it can be said that the acquisition process involves loss shared between the acquiring company and the American Eagle Savings Bank. Implications of the Failure on Customers and Businesses The implication for local businesses and Customers by Eagle Savings Bank acquisition by Capital Bank evidently involves claims on the investments. It is postulated that claims over failed business are likely to fail which may lead to incurrence of losses by the customers and the business function of the company (Pierre, McDonald, Rudick, Winik, Weber & Handy, 2012). The suppliers of the company who provided it with equipment, space and furniture would also be implicated significantly by the failure of the bank and its acquisition by the capital bank. The situation worsened when the customers and suppliers were not paid. It is in this sense that their claim from the company was justified. It is therefore the role of closing terms to define who provides communication to customers and suppliers who have not been paid for their services and products in order to determine who would be responsible for their financial rights or payments. The limitations of filling claims by the customers and stakeholders of the company are one of the implications of the acquisition. It is postulated that a mutual company or one which is undergoing acquisition is often owned by the depositors. Because deposits into a company represent an ownership of the company, it can be argued that depositors are the core stakeholders of a company. Therefore the implications of the acquisition of American Eagle Savings Bank by the Capital Bank have consequential implications for the latter’s shareholders. These include the complaints that the customers have to register in terms of receivership. Additionally there are priority claims which are related to the implications of company ownership to the customers and business units. Nonetheless, these claims are related to the administrative expenses for the departments and rights of the shareholders and owners as covered by the legal framework. In light of the above discussions and reflections it is evident that the acquisition of the Eagle Savings Bank by the Capital Bank has consequential implications for the shareholders. For example the investments of shareholders of the company are faced with issues of claiming their ownership for the company. The causes of the failure of the American Eagle Savings Bank emanate from poor capitalization as indicated by the subsequent E ranting which eventually lead to its failure despite the many years of operation. The time table of the company’s failure is characterized by a cascade of events which led to its acquisition by the Capital Bank. This is obviously a reason for the negative implications for the customers, stakeholders and shareholders of the company which include severe problems with claiming their securities and determining who was to take responsibility for such claims. It is therefore recommended for the acquisition or takeover process to ensure that procedures and policies are designed and adhered to in order to ensure that the stakeholders achieve their financial and constitutional rights without any mishap. References Carlson, B. (2009). Sterling savings bank execs target SW Idaho growth. The Idaho Business Review, 1 Fair Disclosure (2009). Event brief of Q3 2009 American eagle outfitters Inc., earnings conference call - final. Fair Disclosure Wire, pp. 1-2 Fisher, R. A. (1992, Aug 17). First federal savings bank acquires heritage savings bank. PR Newswire, pp. 1- Pierre, K. t., McDonald, J. E., Rudick, B. B., Winik, M., Weber, I., & Handy, P. G. (2012). U.S. Banks: A Branch Data Deep Dive. Bernstein White Book - U.S. Banks: A Branch Data Deep Dive, 1-131 Schweikart, L., & Doti, L. (2010). American Entrepreneur: The Fascinating Stories of the People Who Defined Business in the United States. American Management Associations Read More