Bank Failures: If My Assets Exceed Deposits, How Can I Be A Failing Banker?

Okay, I’m looking at a list of failed banks.
In most cases, Deposits (which are your liability, if you’re a bank) are exceeded by your Assets by tens of millions.
How are these failed banks?

First Georgia Community Bank, Jackson, Georgia, with approximately $237.5 million in total assets and $197.4 million in total deposits, was closed. United Bank, Zebulon, Georgia has agreed to assume all deposits.

PFF Bank and Trust, Pomona, California, with $3.7 billion in assets and $2.4 billion in deposits was closed. In a transaction facilitated by the FDIC, U.S. Bank, National Association acquired the banking operations of PFF Bank and Trust, and agreed to assume all deposits.

When your assets are outstanding loans, they’re not equivalent to cash on hand. If people start withdrawing cash faster than loan payments are due (or if people aren’t making their loan payments), the bank runs out of money.

As InvisibleWombat said, assets can include things like money you’re owed, land, buildings, equipment, etc. Those are great, but you can’t pay your depositors back with a building! If you run out of enough cash-on-hand to pay your depositors today when they try to take funds out of an ATM, that’s the definition of bankruptcy.

I guess I get it, but it blows my mind that the above bank in Pomona had $1.3B in assets more than deposits and still failed to survive.
That means that at least 44% of their assets were… I guess… imaginary?

There can be a lot of creative accounting in determining what’s an asset. One of the core problems of the recent crisis was the sudden realization that a lot of the mortgage-backed securities aren’t worth what they were purchased for. Sure, the bank has millions in this form of “asset”, but if they actually tried to sell them, they could only get a fraction of the value they supposedly hold. However, on the balance sheet, these assets are publicly assumed to be worth face value.

I understand that currently, banks are being “stress tested” to see what their balance sheets look like if they actually had to sell these assets to raise cash. I think this involves a simulated market to try to approximate the actual market value, and see which banks still are viable after the true value of all the assets is known.

Not really true. Once an asset is marked to market then it’s value is reduced on the balance sheet. Essentially, if the securities are classified as available for sale, then they need to be marked to market. If they are classified as hold to maturity, then they do not need to be unless they are deemed to be impaired.

Deposits are not the sole liability on the balance sheet. Typically banks will have other debt such as borrowings from the federal home loan bank. What you want to look at are the capital ratios of which the main ones are tier one core capital ratio and the risk based capital ratios. There are certain benchmarks that must be met for a bank to be considered well capitalized. It is likely that these banks were shut down by their regulators due to being under capitalized.

Thank you LonghornDave.
That helps.

Well, since banks can loan out something along the line of $10 for every $1 they take in deposits…

Also, you can follow up a few weeks afterward to see what the assets sell for to another buyer, if they sell at all. A lot of this is posted on the FDIC website.

For example, if a bank is seized and has $100 million worth of assets, but they only sell for $50 million to a buyer, that’s a market price of 50 cents on the dollar. In other words, the loans were shit. The $100 million was merely par value of the loan amounts at the time of seizure.

Some of the assets fail to find a market price (or buyer) at all.