U.S. regulators seized three Puerto Rican banks on Friday and sold their deposits to other banks, costing the Federal Deposit Insurance Corp insurance fund $5.3 billion -- one of the largest hits in the banking crisis.

The FDIC said regulators had seized the banking operations of EuroBancshares Inc , R&G Financial Corp and W Holding Co Inc in a move that will consolidate the struggling area's financial sector.

By seizing and selling the banks' deposits to stronger banks, the FDIC said it saved $3.5 billion over the cost of outright liquidation. A spokeswoman for the FDIC said the agency received 18 bids from five bidders.

The seized banks in Puerto Rico dwarfed in size the failures of four other banks also announced Friday, bringing the number of failed U.S. lenders this year to 64. The quartet of U.S. banks included CF Bancorp of Port Huron, Michigan; Champion Bank of Creve Coeur, Missouri; BC National Banks of Butler, Missouri; and Frontier Bank of Everett, Washington.

Figuring out what to do with the weakest of Puerto Rico's banks had been a thorny problem for the FDIC, which expects to sink about $100 billion into shoring up wobbly banks between 2009 and 2013.

An accounting scandal weakened many of the island's biggest banks beginning in 2005, making it difficult for the FDIC to find local buyers strong enough for the assets, people briefed on the matter said. But most buyers from outside Puerto Rico were reluctant to gain exposure to an island with 16 percent unemployment that has been in recession since 2006.

The three banks being shut down suffered from a surfeit of construction loans, and other bad loans, a legacy of a housing boom on the island in the middle part of the decade.

Oriental Bank and Trust is assuming the deposits of Eurobank, Scotiabank de Puerto Rico is assuming the deposits of R-G Premier Bank of Puerto Rico, and Banco Popular of Puerto Rico is assuming the deposits of Westernbank Puerto Rico, the FDIC said.

Scotiabank de Puerto Rico is a unit of Canada's Scotiabank, marking the third time in recent weeks that the FDIC has sold failed lenders to Canadian banks.

In transactions announced on Friday, the FDIC has seized lenders controlling about 20 percent of the banking assets on the island, and about a quarter of the deposits.

Even after sorting out these deals, Puerto Rico is wrestling with difficult issues.

The local government is spending less and boosting taxes, and many banks are still wrestling with bad assets, so credit is still tight on the island, said Sergio Marxuach, policy director at a Puerto Rican economic think tank.

If banks are not lending, and the government is not spending, it's very hard for the economy to grow, Marxuach said.

The Puerto Rican government is forecasting 0.4 percent growth for the fiscal year beginning July 1, but meeting that forecast may be tough, Marxuach said.

EMERGENCY PROVISIONS

The Federal Reserve used emergency provisions to okay one of the transactions.

Banco Popular, the largest of Puerto Rico's banks by assets, had about 27.4 percent of the area's total insured deposits. After the acquisition of Westernbank, it will have a 31.4 percent share. Typically the maximum for a state is 30 percent.

The Fed said, the anticompetitive effects of this proposal in the relevant markets are clearly outweighed in the public interest by the probable effect of the Banco Popular proposal in meeting the convenience and needs of the communities to be served in Puerto Rico.

FDIC Chairman Sheila Bair said the cost of the failures to the FDIC's insurance fund was much less than initial estimates, due to the interest of acquirers.

All three of the buyers are receiving the deposits of the banks they've acquired, and are sharing losses with the government on some assets.

Deutsche Bank acted as the lead strategic adviser to the FDIC for these deals.

Some of the acquiring banks have problems of their own.

Nearly 10 percent of Banco Popular's loans were bad at the end of 2009. For Oriental, it was around 9 percent. For most healthy banks, nonperforming loans make up closer to 3 to 4 percent of the loan book.

Oriental is in better shape than Popular, because loans make up less than 20 percent of its overall assets. That means just 1.7 percent of the bank's total assets are nonperforming.

But it also means the bank is putting most of its funds in securities like Treasuries that -- unlike loans -- don't fund growth on the island.

Banks that wanted to bid had to prove they could raise capital first. Doral Financial Corp, the fourth-largest bank on the island, raised $420 million of capital contingent on its buying a bank from the FDIC, but it failed to win.

Other banks that failed on Friday include CF Bancorp, which was taken over by First Michigan Bank; Champion Bank, taken over by Bankliberty; and BC National Banks, taken over by Community First Bank; and Frontier Bank, taken over by Union Bank, National Association, San Francisco.

Collectively, those four failures cost the FDIC's insurance fund just over $2 billion.

(Reporting by Karey Wutkowski in Washington and Dan Wilchins and Maria Aspan in New York; Editing by Bernard Orr)

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