Meanwhile, The Number of Failed Banks Continues to Mount

Meanwhile, The Number of Failed Banks Continues to Mount

Early on during the current wave of bank failures, there were some pretty reckless predictions about how many banks might fail - indeed, some commentators suggested as many as 1,000 banks might ultimately fail, a prediction that I disputed at the time. But while it continues to seem highly unlikely that as many as 1,000 banks ultimately will fail, the failed banks are continuing to accumulate and we recently passed a significant failed bank milestone.

The total number of bank failures since January 1, 2008 now stands at 406. The 400th bank failed without much fanfare a couple of weeks ago, on October 14, 2011. Regulators took control of four different banks on October 14, and four more the following Friday, October 21, 2011. With these latest bank failures, the total number of failed banks in 2011 now stands at 84. This year's total seems highly unlikely to reach the 157 banks that failed in 2010 or the 140 that failed in 2009. But with about nine or ten weeks left to go in the year, it is possible that the total number of bank failures this year could reach as many as 100, particularly if the FDIC continues to take control of as many as four additional banks each Friday evening.

Many of the bank failures since January 1, 2008 have been concentrated in just a small number of states. Indeed just four states account for 214 of the failed banks or about 52% of the total: Georgia (73); Florida (57); Illinois (46) and California (38). Even during this fourth year of the failed bank wave, these same states continue to have the largest numbers of bank failures, particularly Georgia, which has had 22 bank failures this year alone. During 2011, Florida has had 12, Illinois has had 11 and California has three. Together these four states account for 45 of the 84 bank failures during 2011, or roughly 53%.

By interesting contrast to these states that have experienced such a high number of failed banks, eleven states have had not bank failures at all so far. The eleven states without any failed banks are Connecticut, Delaware, Hawaii, Iowa, Maine, Montana, New Hampshire, North Dakota, Rhode Island, Tennessee and Vermont. Among other things, this list suggests that the New England states have fared pretty well during the bank failure wave.

As the banks have failed, the failed bank litigation has also accumulated --  although the FDIC's failed bank litigation has accumulated gradually. So far the FDIC has initiated 15 lawsuits against the directors and officers of 14 different institutions. As of October 24, 2011, the FDIC has authorized lawsuits involving 34 failed institutions and 308 officers and directors for D&O liability of at least $7.3 billion. As the total number of failed banks continues to accumulate, the authorized number of lawsuits will only grow.

The lag time between the date of bank closure and the date of the FDIC's lawsuit filing seems to be running at least two years or more. As Jon Joseph points out in an October 24, 2011 post on his law firm blog (here), more than more than 335 of the 406 total bank failures occurred after July 2009, which seems to suggest that we are about to enter an extended period of active FDIC failed bank litigation. Joseph states in his blog post that now that time has elapsed since the wave of bank failures began to accumulate significantly," the pace of lawsuits against former bank officers and directors will increase markedly." Joseph also points out two thirds of the 15 FDIC failed bank lawsuits so far have involved failed banks in Georgia, California and Illinois (which is slightly more than the distribution of failed banks among those states but hardly surprising given the number of bank failures in those states.)

Of course, time will tell whether and to what extent we will see an uptick in FDIC failed bank litigation. But not only does significant litigation activity seem likely, it seems likely that the litigation will continue to accumulate for some time to come, given that banks are continuing to fail in significant numbers. Indeed, the recent closures would seem to suggest that the FDIC failed bank litigation will be continuing to arise well into 2014. As banks continue to fail in the weeks and months to come, this projected date could move into 2015.

Better get used to FDIC failed bank litigation, because it is going to be a big part of the landscape in the directors' and officers' liability arena for some time to come. In light of these issues, Jon Joseph has some practical suggestions for the boards of the surviving banks, in the blog post I linked to above.

Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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