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Home | Opinion Exchange | Editorials

Editorial: A state bank fails, but system passes

Bankers, regulators and citizens keep system stable.

Last update: July 4, 2009 - 1:24 PM

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NOT TOO BIG TO FAIL

"The banks are privately owned companies, and they're heavily regulated. But they have a constitutional right to fail. We don't view our mission as preventing all bank failures, but more to minimize the downside and inconvenience to the citizens and the customers associated with a failure."

Kevin Murphy, a deputy commissioner of the Minnesota Commerce Department

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Horizon Bank in Pine City, Minn., has failed, but the state's banking system has passed a critical test. That should reassure all Minnesotans that despite the shaky economy, the state's banks are on solid ground.

Horizon, with just $87.6 million in assets, was only the second state bank to fail since the real estate bubble burst, while nationally there have been 106 failures. The relatively low number is even more impressive considering Minnesota has the third most bank charters in the country, behind only Illinois and Texas.

Why so many? "It's sort of a combination of our spirit, our independent thinking and also the way the rules were structured with a bias against branch banking," explained Joe Witt, president and CEO of the Minnesota Bankers Association, which represents 95 percent of the 436 state-chartered banks.

One of the other independent Minnesota banks, Stearns Bank of St. Cloud, took over Horizon in what Kevin Murphy, a deputy commissioner with the state Commerce Department, described as "a pretty seamless deal. Basically the bank reopened the next morning with a new sign out front, which is the way it's supposed to work."

Of course, it's not that easy. But when bank regulation works as it should in a bank failure, consumers are protected, their money is safe, and enough sound institutions are in place and able to take the risks necessary to grow Minnesota's economy.

"Our big objective is to make sure we have a competitive environment for financial services," said Murphy. "We want to have a lot of banks and a lot of choices for consumers. That's on one side of the ledger. On the other side we want to have minimal failures. We have these two conflicting objectives that we're trying to balance out."

This dynamic tension will probably result in tense moments at some of the 65 state banks currently on a "watch list" compiled by the Federal Deposit Insurance Corp.

"There will be more bank failures," predicted Grand Rapids State Bank President and CEO Noah Wilcox, who is also active with the Independent Community Bankers of Minnesota. "What's important about that is we have a very effective, efficient, resolution process. And while it doesn't work for the biggest 10 or 15 companies in the industry -- Citibank, JP Morgan -- that the banks that need to be resolved are going to be done so in a way that is safe for the consumer, that doesn't cause panic, and when it's done with, they will be in a stronger institution with access to their dollars."

But the failures should be kept to a minimum, partly due to the industry's efforts as well as the regulatory system. And partly due to the very nature of Minnesotans.

"There's a general conservative sense -- not politically -- but from just a monetary standpoint in the Midwest," said Wilcox.

David Vang, chairman of the Department of Finance at the University of St. Thomas, agrees. "I don't know if it's a cultural thing, but even our major banks that are centrally located here like US Bank and Wells Fargo didn't seem to extend themselves, either. So we weren't all chasing each other to the bottom of the barrel."

Minnesotans should expect another community bank to fail. Or two. But they can also count on the state's bankers, its government regulators and, most crucially, its people, to keep the system sound.

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