Superior Bank was one of the promising businesses in the thrift industry. It had all the potential to become one of the best banks in the nation. The continuing scrutiny and investigation would unearth some of those pending issues.
The Savings Association Insurance Fund was one of the regulators of Superior Bank. In the five years leading to its downfall, it had paid out approximately $24 million in claims to depositors (Friedman and Kraus 250). The action led to the drop in the reserve to deposit ratio to 1.37% towards the end of 2001. The Federal Deposit Insurance Corporation administered the guarantees of deposits. The agency, together with the Office of Thrift Supervision examined thrift institutions and rated them, according to their book records. For instance, in 1999, the agency gave Superior Bank a CAMELS 1 rating after inspecting their books of accounts from Ernst and Young.
The FDIC also provided industry standards for rating the institutions. In 1996, the industry average for return on assets was 0.60% and yet Superior Bank had its return on assets rate at 7.25%. It should have been the basis for more investigations, but the agency ignored such evidence. The Office of Thrift Supervision was an agency within the department of the treasury. It was instrumental in checking the books of accounts of Superior Bank and giving recommendations (Friedman and Kraus 250). One of the officials provided an indication that the Chairman of Superior Bank, Stephenson, was a very persuasive and domineering individual. He influenced decision-making and supported the accounting methodologies that led to the collapse of the bank.
At one time, in the 1999 investigations into Superior’s books of accounts, OTS blocked FDIC from participating in the inspection. The tug of war was a result of influential authorities from Superior Bank preventing the FDIC because of the ongoing litigation processes. The report led to the drop in Superior Bank’s CAMEL rating to 3. There was a rising concentration of residuals on its books. One of the owners of Superior Bank was the Pritzker family. They owned 50% stake in the bank and were influential both politically and economically. Their hand in politics led them to have access to the government authorities and be able to call for help from very powerful individuals in the government.
The agencies appeared to have frictions while working with Superior Bank because the OTS worked directly with the Treasury. The FDIC seemed to lean more on the political wing since it was a federal agency. While OTS boasted of regulatory authority over thrift banks, FDIC seemed to be protective of the public’s money. It had to protect the customers’ deposits and at the same time save the public taxes from wastage.
The regulatory structure was not adequate in its organization and processes. The agencies should have raised the alarm as early as the beginning of the 1990s when Superior bank’s books of accounts seemed to portray very many irregularities in their entries. They should have acted when they discovered that the management and directors did not have a say in the affairs of the bank. But later, after the collapse of First National Bank, the agencies saw the need for employing tougher measures. It led to the possession of the bank by the FDIC after the bank failed to honor the agencies’ recommendations (Friedman and Kraus 250).
The agencies did not have the strong legal framework to stop Superior Bank from messing up with its wrong strategy. And hence the FDIC board had to institute the structure for its agency to participate fully in the examinations.
Friedman, Jeffrey, and Wladimir Kraus. Engineering the Financial Crisis, Philadelphia: University of Pennsylvania Press, 2011. Print.