The crisis in Superior Bank was associated with the fact that the directors failed to observe and address risky financial management strategies that were followed in the organization, and the regulators did not pay much attention to the inadequateness of the used asset valuation methods. The capitalization analysis made by the regulators demonstrated that the bank was rather safe and stable, as it was noted in 1993 and then in 1997 when the bank was rated 1 according to CAMELS. Further examinations of the situation in 1999 and 2001 indicated that the real situation in the bank could be rated 4 and then 5, according to CAMELS.
The regulators proposed necessary write-downs in order to fix financial problems in 2001. However, the Pritzkers as owners were not inclined to invest their capital into the bank during a long period of time, and the investments were ceased. The propositions on write-downs and investments were financially reasonable because they are typical practices. Nevertheless, the Pritzkers chose to oppose the regulators’ pressure, and they did not invest much capital in Superior Bank in order to cover the gap following the write-downs. The decision of the owners can be discussed as rather unpredictable. Still, further analysis of the write-down practice is necessary to understand the owners’ decision.
Although a write-down is an effective strategy to decrease the asset value, to address the real value, and to fix inconsistencies associated with the inappropriate valuation method, this practice can be not enough in certain cases. A write-down was proposed by the regulators in Superior Bank in order to fix the faults associated with the previously used method of valuing assets. From this point, the regulators’ criticism was expected and justified because of the necessity to improve the financial statements of the bank and avoid mistakes. Still, the impact of the proposed strategies was not positive because the regulators had failed to make the directors act earlier. CAMELS ratings of 1 and 2 were given to Superior Bank even when faulty numbers were presented in the financial statements and the ineffective valuation of residual assets was approved. Therefore, the criticism was necessary, but it was untimely because the regulators mostly referred to the outside reports on the activities of Superior Bank.
It is possible to state that the significant gap observed in the estimated capital after the made write-downs in Superior Bank was a result of the directors’ inactions during a long period of time. Although the regulators pointed at the inappropriateness of the strategy used in the bank in order to value assets, the expected changes were not made. Therefore, in 2000, more than $990 million were presented as residual assets in the bank’s financial documentation. However, the actual value of residual assets could not be estimated accurately. As a result, the first required a $270 million write-down, and the further $150 million write-downs led to significant differences between the apparent capital and the real capital of Superior Bank.
More attention should have been paid to predicting changes in asset values in order to avoid write-downs and following failures because of the inadequate gap between reported and actual capitals. The actions of both regulators and directors can be discussed as ineffective in the situation when Superior Bank was using a risky strategy for a long period of time without addressing the possible future changes in the assets’ values.