Colonial Bank Failure Shows State of Economy

Recession far from over

Bank RepaymentThe economy hasn’t been making headlines quite as much lately as it did during the economic stimulus package legislation or the official start of the recession. But recent activity in the banking industry shows that things have not turned around just yet.

CNN Money reports:

Troubled Colonial BancGroup will be bought by rival BB&T Friday, the government said after state regulators closed the bank whose assets had been frozen by a federal judge.

The Montgomery, Ala., bank, which has 346 branches spread across Florida, Alabama, Georgia, Nevada, and Texas, is the sixth largest bank failure in U.S. history and by far the largest failure of 2009.

With $25 billion in assets and $20 billion in deposits, Colonial is 100 times larger than the typical bank to have failed this year.

Colonial Bank failure won’t affect customers

If you’re a customer of Colonial Bank, don’t run out and get cash advances just yet. CNN says that most customers of Colonial Bank will not be affected by the Colonial Bank failure.

CNN also reports that BB&T is going to buy $22 billion of Colonial Banks assets, deposits and branches. The remainder of Colonial Bank’s assets will go to the Federal Deposit Insurance Corp.

More about BB&T from CNN:

BB&T, based in Winston-Salem, N.C., is also a regional banking power, with 1,500 branches across the Southeast. It is also a major mortgage lender.

The Colonial  Bank failure and its sale to BB&T also comes a day after U.S. District Judge Adalberto Jordan ruled in favor of Bank of America, which had requested a temporary restraining order to keep Colonial from liquidating or transferring assets worth $1 billion.

Economic effects

The Colonial Bank failure, because of its magnitude, will have an effect on the national economy as a whole. CNN says home buyers and those who want to refinance their mortgages could end up paying higher rates, even if they have never heard of Colonial, said Guy Cecala, publisher of trade publication Inside Mortgage Finance.

The Colonial Bank failure delivers another blow to the FDIC trust fund, which so far has covered 77 bank failures in 2009. The fund spent $35.1 billion in 2008, and it took a $4.3 billion decline in the first quarter of this year. That left it with $13 billion as of March 31.

“The past 18 months have been a very trying period in the financial services arena,” said FDIC Chairman Sheila Bair, in the Colonial failure release. “Our industry funded reserves have covered all losses to date. In fact, losses from today’s failures are lower than had been projected.”

A year ago, bank failures were relatively rare. There were only four in the first six months of last year. The 77 bank failures so far in 2009 has more than tripled last year’s total of 25.

More about Colonial Bank

Cecala said Colonial Bank was a big player in “mortgage warehouse” lending, which provides financing needed by mortgage brokers and non-bank lenders to make home loans.

The Colonial Bank failure will likely be one of the most expensive bank failures, according to Chip MacDonald, a banking lawyer at Jones Day, given its active position in mortgage warehouse lending across the Southeast.

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