WASHINGTON - US BANK regulators closed Franklin Bank SSB, a Houston-based community bank, on Friday, making it the third-largest and 18th US bank failure this year as slumping home prices and the worsening economic crisis take an increasing toll.

Prosperity Bank of El Campo, Texas, will acquire all the deposits of Franklin Bank SSB, the Federal Deposit Insurance Corp (FDIC) said.

Mr Lewis Ranieri, the co-inventor of the mortgage-backed security, is chairman of the bank's parent company Franklin Bank Corp, which has been searching for fresh funds after bad mortgages drained the bank's capital position.

Franklin Bank Corp said on Sunday that it had received proposals from parties to strengthen the capital position of Franklin Bank SSB.

It said that it was in talks to restore the banking unit to a 'well-capitalised' position. The bank had previously disclosed that it had submitted new third-quarter figures to banking regulators that showed the bank to be 'significantly undercapitalised'.

The FDIC said Franklin Bank SSB's 46 offices will reopen as branches of Prosperity Bank under their normal hours, including those with Saturday hours.

As of Sept 30, Franklin Bank SSB had total assets of US$5.1 billion (S$7.6 billion) and total deposits of US$3.7 billion, the FDIC said.

Prosperity agreed to assume all of the deposits, including those that exceeded the insurance limit for deposits.

'Prosperity is committed to taking care of their existing and new customers during this volatile time in the financial industry,' Prosperity said in a statement. 'It is our goal to make sure that this transaction will be a smooth process for Franklin Bank's customers and associates.'

The failure is expected to cost the FDIC's insurance fund between US$1.4 billion and US$1.8 billion, the regulator said. The insurance fund stood at about US$45 billion at the end of June, the last time it was publicly disclosed.

A financial rescue plan passed by Congress earlier this month temporarily raised the limits on deposit insurance to US$250,000 per account from US$100,000. -- REUTERS