I think the most obvious explanation is that this bank may be another victim of the "sudden" rise in interest rates we're seeing in the last couple of years. This time it was 300 million in assets plus deposits, and the FDIC allegedly will lose 50 million on the rescue operation. The US have thousands of banks of similar size to this one. May be down the road the number of 50 million losses will become unbearable, who knows.
FDIC can surcharge remaining banks through their assessments (FDIC insurance premiums). It’s a broadly distributed tax on bank customers in aggregate. So long as US banking exists, there will be banks to charge to keep the fund solvent.
They just need to kick the can long enough to give impairments caused by rapid rate increases time to burn off.
And what happens if these impairments start to gradually become more and more realized losses, as their due dates come? I can't see the FED making a 180 anytime soon, in fact I've been buying treasuries for the most part. Everybody in the world may want (and need) lower rates, but it's like fighting against the sunrise, if it's time for it it's time and that's it. What will happen when it's not Heartland Bank from Bumf*ck Arkansas that is going under from betting on the wrong macroeconomic path, but let's say, Bank of America? Would the other banks have the cash to bail this one out? Or will the FED in the end have to print piles and piles of colored paper, raising inflation and then having to raise rates, bla bla bla. It's going to be interesting to see what happens in the next few years.
In many of these bank failures, the problem has been that they are holding very safe loans at an interest rate that is too low for today's environment. In practice, if they are allowed to survive until the loans mature, they will get all the principal back, so there won't be a realized loss there. Unfortunately, the rate is so low that if you need to sell the loan today it will be at a substantial discount to face value.
The losses that the banks would actually realize are that the cost of deposits have gone up: People want a higher interest rate on their deposits. If they don't get that rate, people pull their deposits, and banks aren't allowed to hold their safe loans to maturity because they need cash now.
Historically, rising rates have been good for banks because deposits are sticky and the banks can raise their customers' interest rates more slowly than they raise the rates on the loans they make. It seems that customers are more fickle now, and many banks weren't prepared for that.
My naive, and cynical, understanding of this type of policy, is the point is to kick the can down to the next generation. It didn't start this way (I hope), but I view it as an accepted solution to make sure the bomb's timer is my_age+1yr.
Silicon Valley Bank marked their debt to maturity, until they ran out of liquidity and were shut down. But rising rates does not affect fixed rate loans.
