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Bank Failure Upswing Expected

Sarah's picture

Last year the FDIC seized 25 banks. In the first month and a half of this year, the agency has already shuttered 14 more institutions. The end is not in sight, according to Reuters -- but the story's come out through their UK outlet.

Bank analysts and industry insiders say a continued deterioration in credit conditions will be the driving force behind a big upswing in the number of failures, but policy decisions will also push the numbers up.

Apparently the rise in failures isn't altogether unexpected, though. It would appear that some of the banks closed this year could have been shuttered two to six months before they were -- but the Bush administration wouldn't allow the regulators to do so, fearing a loss of confidence.

The FDIC has also been freed from the shackles of a previous administration that may have delayed bank closures to increase confidence in the financial industry last year, said Ken Thomas, a bank consultant and economist based in Miami.
"There were many more banks that could have been closed," Thomas said. "What we've seen is a total ramping up in failures, a total new policy."
The FDIC and a bank's primary regulator have some latitude on when exactly to close an insolvent bank's doors. Declaring a bank failure sooner rather than later often minimizes taxpayer costs.
The small U.S. banks that failed in recent weeks could easily have been closed last June or September, said Thomas, who expects more than 100 bank failures in 2009.
Other predictions are more pessimistic. RBC Capital Markets said recently more than 1,000 U.S. banks -- or one in eight lenders -- may fail in the next three to five years.

A couple days ago I heard a story on NPR about the new FDIC hires,

and the expectation that more will be needed.

Bridgett Pukszta, one of the new FDIC employees, used to manage a large commercial and residential real estate portfolio in southern California. "I have assignments coming up pretty quickly, and I'm running around looking for a cable lock for my laptop and passwords aren't up and running, and people aren't entered into the system," she says. "This is a big undertaking."

It's a four-day training experience, and (not unlike many a crash-driven Fed operation, the 1990 and 2000 decennial census operations included), it's going about as smoothly as ... a multi-car collision on a fog-bound Interstate.

On Thursday, the agency will release data on the state of the banking industry in the final quarter of 2008, including an update on the number of problem banks on its watchlist and how much money it is setting aside to handle future failures.
The number of problem banks -- banks that are under close scrutiny and often have weak capital cushions -- spiked in the third quarter to 171 from 117 at the end of the prior quarter. That marked the highest number since 1995 when federal regulators were wrapping up the savings and loan crisis.
Thomas said he expects the number of problem banks rose to about 200 at the end of the fourth quarter.
The FDIC will also release an updated figure on how much cash it has left in the Deposit Insurance Fund, an industry-funded reserve to back the deposits at FDIC-member banks, and how much it has provisioned for future failures.
The fund fell 23.5 percent in the third quarter to $34.6 billion. That amount included about $12 billion provisioned for failures it expected in the fourth quarter of 2008.
The FDIC said in December that it expected the fund to drop to about $29 billion at the end of the fourth quarter. The exact figure will be released on Thursday.
The FDIC is under pressure to protect the insurance fund as it grapples with a crisis that could easily exceed the savings and loan collapse when 1,386 lenders failed from 1988 to 1990, said Ronald Glancz, chairman of law firm Venable's financial services group and a former FDIC official.

On the bright(er) side ... there are jobs out there for investigators and accountants who can get their applications in, and have the skills the agency needs.
From the NPR piece:

For new FDIC employees gathered recently in Irvine, Calif., it is their fourth day on the job. Six weeks earlier, they might have been selling subprime mortgages. Now they work for the government. Tom Murray, one of the bosses, moves up to the podium and tells the 32 new workers he's glad they've come on board.

"And this is historical, what we're doing here. The part you are playing and the effort that we are doing is integral to helping the economy. The FDIC mission is to ensure the stability of the banking system," Murray says.

That last line, often heard at the FDIC, may seem overwhelming: Welcome to your new job, now all you have to do is ensure the stability of the banking system. No one gets up at the podium and says you are here to help us prepare for the largest number of bank failures in decades.

So, yes, apparently we are looking at something similar to the S&L debacle at a minimum; some of the smaller banks now in trouble got that way by loaning aggressively to real estate developers, who have defaulted or are otherwise delaying/ not repaying the loans.
This is bad for communities as well as for the nation as a whole.

Deregulation as pushed by Phil Gramm did no favors for the nation. Evidently, the round of this stuff that hit about 20 years ago (the Reagan / Bush I interval) has fallen down the memory hole...

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DCblogger's picture
Submitted by DCblogger on

surely banks seized by the FDIC could write down loans, what does the FDIC care after it has seized the bank, surely economic stablization would take precedence.