Puerto Rico Governor, FDIC's Bair Call Bank Closure A Milestone

The closure and sale of three Puerto Rican banks on Friday is a milestone in the recovery of the U.S.'s troubled banking industry, Federal Deposit Insurance Corp.'s Chairman Sheila Bair said at a press conference Saturday.

"I really think we are...at an inflection point in the health of the banking system," Bair said during a press conference at La Fortaleza, the Puerto Rico governor's mansion.

"The pricing" for the banks, closed by the Office of the Commissioner of Financial Institutions of Puerto Rico and sold by the FDIC, "was better" than expected, "the bidding interest was stronger than anticipated, the ability of local institutions interested in bidding to raise capital that is not contingent capital was pretty phenomenal."

"We see that on the mainland too," Bair said. "We see signs of repair in the banking system."

The three closed banks collapsed under the weight of bad real estate loans and construction loans. Popular Inc. (BPOP), the island's biggest bank, bought W Holding Co. Inc.'s (WHI) Westernbank, and Oriental Financial Group Inc. (OFG), the island's second-smallest bank, bought EuroBancshares Inc.'s (EUBK) EuroBank. Canada's Bank of Nova Scotia (BNS) bought R&G Financial Corp.'s (RGFC) R-G Premier Bank.

Puerto Rico Governor Luis Fortuno said the closure of three of the island's banks is a turning point for its economy. "We needed a strong, fully functioning banking industry. That's what we have today," he said.

Bair said she agreed. "There is optimism in the Puerto Rican economy," she said. The acquiring banks must offer modifications and work-out options to consumers and businesses that fell behind in their payments, she said, a measure intended to prevent a worsening of the island's economic crisis and ease concerns about falling real estate values.

The process of selling the banks was a considerable challenge for the FDIC, which cost its deposit insurance fund $5.28 billion, less than about $6 billion the agency expected. There was little interest, and no bidding, from mainland U.S. banks. The three closed banks held about a quarter of the assets of the 10 banks headquartered on the island, and almost 30% of the island's deposits. Not since the savings and loan crisis in the 1990s had the agency dealt with such a big problem in one banking market.

Five banks made 18 different bids for the three banks and their assets, Bair said during a press conference late Friday. Three banks, including two that made winning bids, Popular and Oriental, raised a combined $1.25 billion in capital to bolster their bids. "There will be many more bank failures," Bair warned Saturday, but reiterating that the FDIC foresees fewer closures than it expected earlier in the financial crisis.

Governor Fortuno said during an interview at his office, "We need capital to move the economy. Now, with this infusion, there is capital." He said he addressed with the acquirers concerns that Popular, Bank of Nova Scotia, and Oriental will focus on working out bad loans rather than making new ones. But because the acquirers already operate in Puerto Rico, "There is no learning curve" as there would be if outsiders had bought the banks.

Carlos Garcia, the president of the Government Development Bank for Puerto Rico, said in the same interview: "We'll have a report card soon" about banks' ability and willingness to lend. Puerto Rico is working on eight public-private partnerships in energy, transportation, and education. "All require financing" from local banks, he said.

-By Matthias Rieker, Dow Jones Newswires; 212-416-2471; [e-mail]