Monday, May 3, 2010

Consolidating Puerto Rico's Banks

Last Thursday, I came across an article in the New York Times with the following title: "Puerto Rican Lenders Face their Own Crisis." It was a foreshadowing as to what would occur the following day, when RG Financial Bank, Westernbank and Eurobank were bought by Scotiabank, Banco Popular (the island's largest bank), and Oriental Bank and Trust, respectively. This sell-off cost the American taxpayers a little over $5 billion. All three bank closings by FDIC agents took place smoothly and without incident. Deposits of up to $250,000, at nearly all banks on the island are protected by the FDIC, just as they are on the mainland U.S. Thus, there was little or no panic amongst bank customers.

This latest round of bank closings didn't come as a huge shock to some, as all three banks have already been warned by the FDIC to raise its liquidity levels, or merge with other healthier banks. In fact, they were given a March 31st deadline to do so. Most of these failed banks bet heavily on the local housing market, which is considered to be over-saturated. Their combined deposits represented over a quarter of the island's total deposits. The financial crisis, which has led to over 200 bank failures in the mainland U.S since the beginning of 2008, can now include these three Puerto Rican banks on its list. After this consolidation, the Puerto Rican banking sector now has seven major players. Gov. Fortuño claims the island now has a stronger banking system, as a result of these closures. However, many foresee an even more tightening of the belt when it comes to taking out a loan. Thus, adding insult to injury to an already weak economy, which has been in a recession for the past four years going on five.

No comments: