Failure of Penn Square Bank recalled 

This week marks the 25th anniversary of a jolt that sent the American financial industry into chaos, with the July 5 federal takeover and closing of Penn Square Bank.

Timeline of Penn Square Bank's closing

 

"It was the first bank closure in decades that was newsworthy," said Vince Orza, dean of the Meinders School of Business at Oklahoma City University, then a local television reporter.

On July 5, the bank closed and was put under the control of the federal government, because of:
" 16 violations of exceeding the bank's lending limit, some as much as five times over the legal limit;
" failure to keep adequate loan loss reserves;
" poor documentation of loans; and
" questionable bank audits.

When the bank was taken over, front-page mention of it could be found in The Washington Post. The world was finding out how a small bank in an Oklahoma City shopping center nearly destroyed the free-enterprise system.

FALLOUT
At the time, it was the largest government bank bailout in U.S. history, costing the FDIC $230 million. Dozens of banks across the country also faced closing due to PSB's loan tentacles.

The Washington Post reported on July 9, 1982, that 150 credit unions stood to lose $20 million of their investments in PSB.

"It was scary because people panicked," Orza said. "Right after that you had the collapse of the oil and gas industry. You saw over the next five years the outflow of population from the state of Oklahoma."

What surprises Orza is how the problems at PSB went unnoticed for so long.

"It was a shopping-center bank," he said. "When you think about it, it was a little hole-in-the-wall bank in a shopping center doing billions of dollars of business. If that wasn't a red flag, what else would be?" "Scott Cooper

 

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