U.S. ‘Problem Bank List’ Grew Again Last Quarter; Still Low Compared to Historical Figures​​​

The Federal Deposit Insurance Corp.'s “Problem Bank List” increased again last quarter, capping off a year when U.S. lenders struggled to cope with higher interest rates and more overdue loans for commercial buildings and credit cards, Bloomberg News reported. The Federal Deposit Insurance Corp. said today that its confidential tally of lenders with financial, operational or managerial weaknesses had grown by eight banks to 52, representing 1.1% of the institutions it oversees. The total assets held by those firms increased by $12.8 billion last quarter to $66.3 billion. Although the number of firms on the FDIC’s list remains relatively low compared with historical highs, it continues an increasing trend that started early last year. Overall, the FDIC said that the sector remains strong and resilient. Banks are placed on the problem bank list based on a key risk measure known as CAMELS. The score is based on a 1-5 scale, with 5 being the worst. Banks that are included have a score of 4 or 5, the regulator has said. The regulator said banks on the list get an individualized correction action plan, and their progress will be evaluated by the agency’s regional supervisors. More generally, the FDIC said in its Quarterly Banking Profile that the 4,587 banks it supervises are financially strong as a group. The regulator said that the industry’s net operating revenue hit the $1 trillion mark for the first time since the agency started issuing its snapshots. Read more.

University of Texas School of Law Wins 32nd Annual Conrad B. Duberstein National Bankruptcy Moot Court Competition​​​

The University of Texas School of Law won the 32nd Annual Conrad B. Duberstein National Bankruptcy Moot Court Competition, held March 2-4 in New York City. The competition is co-sponsored by the American Bankruptcy Institute (ABI) and St. John’s University School of Law. Florida International University College of Law took second place in the competition, and teams from Fordham University School of Law and the University of Memphis-Cecil C. Humphreys School of Law shared third-place honors. Florida International University College of Law won for Best Brief, and Tansy Nicholson of Baylor University School of Law won the Best Advocate award. Read more.

Bank Runs Spooked Regulators. Now a Clampdown Is Coming​​​

One year after a series of bank runs threatened the financial system, government officials are preparing to unveil a regulatory response aimed at preventing future meltdowns, the New York Times reported. After months of floating fixes at conferences and in quiet conversations with bank executives, the Federal Reserve and other regulators could unveil new rules this spring. At least some policymakers hope to release their proposal before a regulation-focused conference in June. The interagency clampdown would come on top of another set of proposed and potentially costly regulations that have caused tensions between big banks and their regulators. Taken together, the proposed rules could further rankle the industry. The goal of the new policies would be to prevent the kind of crushing problems and bank runs that toppled Silicon Valley Bank and a series of other regional lenders last spring. The expected tweaks focus on liquidity, or a bank’s ability to act quickly in tumult, in a direct response to issues that became obvious during the 2023 crisis. The banking industry has been unusually outspoken in criticizing the already-proposed rules known as “Basel III Endgame,” the American version of an international accord that would ultimately force large banks to hold more cash-like assets called capital. Bank lobbies have funded a major ad campaign arguing that it would hurt families, home buyers and small businesses by hitting lending. Last week, Jamie Dimon, the chief executive of JPMorgan Chase, the country’s largest bank, vented to clients at a private gathering in Miami Beach that “nothing” regulators had done since last year had addressed the problems that led to the 2023 midsize bank failures. Read more.

Commentary: The Problem Isn’t Big Banks; It’s Banks Getting Bigger​​​*

Recent regional banking crises have revived debates about the size of banks. Larger banks have been more insulated from some of the pressures hitting their smaller peers, such as deposit outflows and heavy concentrations in commercial real estate lending, according to a Wall Street Journal commentary. This suggests that letting banks get bigger might be a pathway to stability — though one that critics would charge shifts the burden to taxpayers to backstop more “too big to fail” behemoths, or would concentrate banking in a way that hurts customers. Another problem: Getting to bigger banks means growing smaller- and medium-sized banks. And what we are seeing is that this process can be fraught with risk. Some of the issues at New York Community Bancorp — which last week delayed its 2023 results report and named a new chief executive, and which has seen its share price decline about 70% this year — are related to its expanding size. NYCB doesn’t share key characteristics of banks that were at the heart of last year’s crisis sparked by Silicon Valley Bank’s collapse, such as huge potential losses on bonds and reliance on uninsured, and thus more skittish, deposits. NYCB, as of the third quarter last year, reported no “held-to-maturity” securities in its portfolio, and as of an early February update, it said that nearly three-quarters of its deposits were insured or collateralized. But it did make recent jumps in asset size and is facing accompanying changes in its regulatory status. NYCB went from $90 billion in assets at the end of 2022 to over $110 billion as of its latest report. Last year it took on some of the assets and liabilities of seized Signature Bank from the Federal Deposit Insurance Corp. With this growth, it crossed the threshold to become what is known in regulatory terms as a Category IV banking institution. Toward the end of 2022 it had completed its acquisition of Flagstar Bancorp, which brought its total assets up to $90 billion at the end of 2022 from $63 billion in the third quarter of that year. (Subscription required.) Read more.

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.
 

Analysis: Insurance Costs and Climate-Vulnerable Areas Pose Challenges to U.S. Housing​​​

Nearly 11 million people live in California’s high-risk wildfire zones, areas that include Los Angeles county, San Diego and the vineyards of Napa and Sonoma. Not long ago, they and homeowners in natural disaster regions around the U.S. would have almost certainly had insurance through a big, national company like State Farm General Insurance Co., Allstate Corp. or Hartford Financial Services Group Inc. But a growing number of insurers are cutting their business in those areas, deterred by more intense and frequent natural disasters, plus state-imposed limits on how much they can charge. Homeowners in the most risky places are now more likely to be covered by state-created, “last resort” insurance programs that provide protection where the private market won’t. Those plans have more than doubled their market share since 2018, and their liabilities crossed the $1 trillion threshold for the first time in 2022, according to Property Insurance Plans Service Office Inc., a research firm that tracks the programs. The most climate-vulnerable states are the most exposed: As of now, Florida’s plan could suffer $525 billion in losses; in California, it’s at least $290 billion, up sixfold from 2018. But even as states have assumed more and more risk, they’ve largely dodged a fundamental question: How will they cover claims in the wake of a truly major catastrophe? There are limited options — levies on private insurers or state residents, or more state borrowing — and none of them are good. Most states haven’t thought this far ahead, or if they have, they’re not explicit about where the money will come from. Out of 36 residual insurance plans that offer coverage for natural catastrophes, 21 don’t explicitly detail how they’d pay deficits, according to new research from consulting group Milliman. States have turned these plans into “a magic hiding place to disappear risk that just gets too big for the private market,” said Nancy Watkins, a principal and consulting actuary based in Milliman’s San Francisco office. Federal lawmakers have begun to take notice of the conjoined problems of rising risks and higher costs. Sen. Sheldon Whitehouse (D-R.I.) is investigating the possibility that a big-enough disaster on Florida’s coast might trigger a national real estate crisis, or push the state’s residual insurer to seek a federal bailout. Meanwhile, Rep. Adam Schiff (D-Calif.) has proposed a national catastrophic reinsurance program, similar to the longstanding — and chronically indebted — National Flood Insurance Program. Read more.

ABI’s 2024 Distressed Real Estate Symposium, to be held in Ojai, Calif., on April 30-May 2 will address impending challenges to the real estate sector! Click here to register!
 

Justice Department Beefs Up Focus on Artificial Intelligence Enforcement, Warns of Harsher Sentences​​​

The Justice Department is stepping up its focus on artificial intelligence, with officials set to warn on Thursday that companies and people who deliberately misuse the technology to advance a white-collar crime like price-fixing and market manipulation will be at risk of receiving a harsher sentence, the Associated Press reported. Deputy Attorney General Lisa Monaco will also say that the Justice Department will take into account how well a company is managing the risks of AI technology each time it assesses a corporate compliance program — a set of policies and procedures designed to detect misconduct and to ensure that executives and employees are following the law. The comments from the Justice Department's No. 2 leader underscore the extent to which law enforcement officials are concerned about how the rapidly developing technology could be exploited, by foreign adversaries or by domestic entities, to harm the U.S. Monaco disclosed the policy moves one day after the Justice Department announced charges against a former Google software engineer accused of stealing AI trade secrets from the Mountain View, Calif.-based company while secretly working with two China-based companies. “All new technologies are a double-edged sword — but AI may be the sharpest blade yet. It holds great promise to improve our lives — but great peril when criminals use it to supercharge their illegal activities, including corporate crime,” Monaco said. The Justice Department, Monaco says, has long used increased sentences for criminals whose behavior is seen as posing an especially serious risk to victims and the public. The same principle applies to AI, she says. “Where AI is deliberately misused to make a white-collar crime significantly more serious," she said, "our prosecutors will be seeking stiffer sentences — for individuals and corporate defendants alike.” Read more.

ABI Diversity Mentoring Program Accepting Applications for New Mentees Extended Through March 15!

ABI's Diversity and Inclusion Mentoring Program (June 2024 – June 2025) seeks to build personal and professional relationships while promoting diversity and leadership within ABI. The goal of the Mentoring Program is to expose mentees to the many aspects of the restructuring profession, including becoming involved in ABI and interacting with mentors’ colleagues, peers and networks. Guided by the DWG Mentoring Subcommittee, there will be bi-monthly meetings or programming to address a variety of topics, with resources from ABI and members of the restructuring community, including judges, trustees, attorneys and financial professionals. These structured events will occur between April 2024 – June 2025 and will provide opportunities to interact with other experienced insolvency professionals while providing an educational program and fostering opportunities to discuss important topics in the mentees’ professional development. For more information, including eligibility requirements and how to apply, please click here.

Asset Sale of the Year Award Nominations Deadline Extended to March 18

ABI’s Asset Sales Committee is seeking nominations for its Annual ABI Asset Sale of the Year award. Any bankruptcy sale that closed between January 1 and December 31, 2023, and involved at least one professional who is a member of ABI’s Asset Sales Committee is eligible. The nomination deadline has been extended to March 18; please send your nominations to Matt LoCascio and Leyza Blanco. For more information, please click here.

Have an Idea for a Topic for an ABI Conference Session? Submit Your Proposal via ABI’s “Call for Abstracts” Page!​​​

ABI has launched an online portal for professionals to submit proposals for educational sessions at future ABI conferences. Submitters can describe their proposed topic, outline the session’s focus and learning goals, suggest speakers, and provide contact information via the portal’s detailed form. The portal can be accessed here.

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