Behind the asset-quality problem sat a hidden one
Bank of Asheville had grown alongside a regional boom in resort, golf, and luxury residential development. When that market broke in the downturn that began in 2008, the loan books of several area banks broke with it. Behind the visible asset-quality problems sat a hidden one. Bank insiders, including the bank’s president, had been drawn into a straw-borrower and loan-kiting scheme tied to a failed luxury development, making loans in the names of nominee borrowers to funnel money to the project and using further loans to keep earlier ones current. Endurance Advisory was engaged to respond to regulatory pressure and rebuild a credit risk function that had failed to contain concentration, underwriting, and exposure problems. The bank was later closed by its state regulator, placed into FDIC receivership in early 2011, and its deposits assumed by an acquiring bank. The insider scheme led to federal criminal convictions. These facts are matters of public record.
KEY TAKEAWAY
Controls that insiders can override are not controls The asset-quality numbers described a real estate problem. The deeper problem was that the bank’s own controls could be overridden by the people they were meant to constrain. Fraud committed by insiders does not show up in a loan file the insiders themselves prepared. The only defense is independence and exposure transparency built in advance of the stress, not after it.
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