By now, you probably have noticed the pattern – every Friday, the FDIC shuts down a handful of banks, usually allowing another larger healthier bank to take over the accounts and branches of the failed bank, and the bigger bank gets to pick and choose which of the assets of the failed bank they would like to buy, and the FDIC throws in enough cash to make the deal work. If the FDIC just shut down the bank, and mailed everyone a check for their bank balance, that is more disruptive to the customers and ends up costing the FDIC more money.
According to John Batchelor’s sources, there are at least 700 “zombie banks” that need to be shut down right away, and the longer they linger in insolvency, the more the eventual damage will be. The FDIC has limited staff to supervise these transactions, especially if the FDIC is picking up toxic assets for eventual sale. At 3-5 banks per week, the FDIC will never catch up with problem
Why aren’t the healthy banks buying up their smaller failing competitors to gain customers and market share? The answer is obvious – the FDIC is providing an incentive if the bigger bank waits until the FDIC approaches them and wants to make a deal. If the “good” bank pursued a failing bank on its own, not only won’t it get FDIC money, it will potentially face lawsuits and anti-trust from the U.S. Justice Department. When the proposed sale is made known to the public, depositors in the failing bank with create a “run” on the bank, stripping it of the deposits the bigger bank wants to buy.
“Subsidize failure, you get more of it”.