Federal auditors say regulators should have taken stronger steps as much as three years ago to curb hazardous lending practices and other problems that led to the failure this spring of Cape Fear Bank.
The Wilmington bank's demise was the first N.C. bank failure since 1993, one of 106 nationwide so far this year.
Cape Fear had a "high-risk profile" at the time of its April 2006 regulatory exam, said the 22-page report this week by the Federal Deposit Insurance Corp.'s Office of Inspector General. By last October, examiners said Cape Fear's level of capital -- a bank's cushion against losses -- was "critically deficient." They concluded "the probability of the institution's failure was high."
Examiners cited multiple problems, including weak management and directors, a heavy concentration of commercial real estate and construction loans and dependence on so-called "hot money," which are high-rate deposits from brokers rather than local customers. Also called brokered deposits, the accounts provide cash to lend but generally at a higher cost, which critics say encourages riskier lending. Investors also are likely to move the money frequently, for better rates, making the benefit to a bank short-lived.
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Examiners told Cape Fear to make changes and considered more stringent enforcement actions.
"In retrospect, such an action may have been prudent because the actions that the institution took... were generally not timely or adequate," the report said.
This April, Cape Fear collapsed under the weight of ailing commercial real estate and construction loans made just a few years ago when the economy was booming. In June, Cooperative Bank, also in Wilmington, became the second. Both failed as coastal property values plunged and sales dried up.
Federal auditors are required to examine nearly every failure and, within six months, generate what is called a "material loss review." The reports are intended to identify what went wrong and what could have been done differently.
The reports come amid growing debate about the role of banking regulators and whether they could have steered the nation clear of financial disaster. The debate highlights the regulatory balancing act of ensuring a safe and orderly banking system while also allowing banks to grow.
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