Why Do Banks Fail On Fridays?
Back on August 7, the daily web magazine Slate.com attempted to explain this phenomenon. With assistance from David Barr and Robert Schoppe of the Federal Deposit Insurance Corporation, Nina Shen Rastogi wrote:
Last week, First Priority Bank in Bradenton, Fla., became the eighth American bank to fail this year. Every single one of these institutions went under on a Friday. Why do banks always go bust on Fridays?
So the government has a full weekend to reopen them under new management. If the banking business didn’t return to normal at the earliest opportunity, the specter of agitated customers might erode public confidence in the banking system, triggering a wider panic. So regulators close banks at the end of the day on Friday to take advantage of the regularly scheduled days off. In that time, officials from the Federal Deposit Insurance Corp.—the agency in charge of supervising the actual takeover—can settle a failed bank’s accounts and carve out assets to liquidate later, thereby easing the transition to a new owner. And if there is no new owner—i.e., if no healthy bank has stepped up to purchase the failed one—then the FDIC can use the weekend to write checks to customers for the total amount of their insured deposits. (The FDIC can also create a temporary bridge bank, as it did last month with IndyMac, to take over the failed bank’s operations.)
Shena Rastogi detailed what exactly transpires on an “FDIC Friday,” as it’s now known. She wrote:
On the Friday of a typical takeover, the FDIC arrives on-site with a large team to manage the transition. (When a large bank fails, this might include upward of 100 people.) The team has two main priorities. First, it must figure out which customers’ deposits are insured and which are not. This can be a tangle, since customers can sock away money in a variety of accounts to ensure that their deposits fall under FDIC-insured limits. The second priority is getting the bank ready to open under new ownership by Monday. That involves discarding any material with the old bank’s name on it—like posters, cashiers’ checks, and marquee signs—and putting the new bank’s paperwork, advertisements, and employees in place. Specialists from other departments, such as facilities, human resources, IT, public relations, and accounting, round out the FDIC’s team. Officials once even hired a hypnotist to help a bank employee remember a vault code.
The FDIC “Failed Bank List” now includes 8 institutions. Will today be another “FDIC Friday?”
Source:
“Why Do Banks Fail on Fridays?”
Nina Shen Rastogi
Slate.com, August 7, 2008
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