Regulators Close Three Banks in Puerto Rico

By MATTHIAS RIEKER and DAMIAN PALETTA

Three Puerto Rican banks were closed by regulators Friday, and the Federal Deposit Insurance Corp. took receivership in one of the biggest single cleanups of failing banks in the current financial crisis.

The FDIC estimated the failures would cost its insurance fund $5.28 billion.

W Holding Co. Inc.'s Westernbank, R&G Financial Corp.'s R-G Premier Bank and EuroBancshares Inc.'s EuroBank collapsed under the weight of bad real-estate loans. The sweeping move by the regulators and the FDIC seeks to repair the island's banking system and provide support for its ailing economy.

The failures represented a challenge for the FDIC, which has had to deal with more than 200 bank failures since the beginning of 2008. The three banks hold about $21 billion in assets, 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.

Popular Inc., the island's largest bank by assets, is buying Westernbank, the largest of the three and the one with the most construction loans. Bank of Nova Scotia bought R-G Premier, and Oriental Financial Group Inc., the island's second smallest bank, bought Eurobank.

The FDIC will guarantee up to 80% of losses from certain assets for all three buyers.

Doral Financial Corp., which had raised $420 million in capital contingent on its participation in the island's bank consolidation, was left empty handed.

The three failed banks have been suffering for some time, and were ordered by regulators last year to clean up their act. All three were in dire need of capital.

Their trouble has had a deep impact on the Puerto Rican economy. The island has been in a recession since 2006, hurt by its government's fiscal deficit and a shrinking manufacturing industry. Only healthy banks can provide the loans for the private sector to lift the economy out of its slump.

Popular's chairman and chief executive Richard Carrion said, "This is a very necessary step" for the economy to recover; "it's a painful step, but you cannot have a recovery without rebuilding banking system."

The FDIC stripped the three failed banks of their brokered deposits, which come from institutional investors and which are less stable than those from local customers. Popular, which has $25 billion of deposits, will only add $2.5 billion in deposits with its acquisition.

Popular will get about $9 billion in assets—an unusual deal because most bidders for failed banks buy deposits and bank branches rather than loans.

Puerto Rico's problems have been on regulators' radar since 2005, when several of the island's banks were tripped up by mortgage derivatives and loan sales. Doral almost failed, and R&G never recovered.

In late 2008, Anibal Acevedo Vila, Puerto Rico's former governor, urged FDIC Chairman Sheila Bair to help direct federal aid to multiple banks in his state, according to correspondence obtained by The Wall Street Journal under a Freedom of Information Act request.

In the letter, written less than a month before he stepped down as governor, Mr. Vila asked for the aid "due to the magnitude and length of the recession in Puerto Rico."

Ms. Bair responded one month later she "wholeheartedly" agreed TARP capital is "necessary" to "keep credit available for consumers and business in Puerto Rico and across the nation."

Write to Matthias Rieker at matthias.rieker@dowjones.com and Damian Paletta at damian.paletta@wsj.com

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