The Federal Deposit Insurance Corp. said it had 416 banks on its "problem list" at the end of June, equivalent to about 5% of the nation's banks, up from 305 at the end of March and 117 at the end of June 2008. Problem banks had a combined $299.8 billion of assets at the end of June, compared with $78.3 billion a year ago.
Landing on the FDIC's problem list means a bank is at a high risk of insolvency. State and federal regulators have already shut 81 banks this year.
"It's a continuation of the deterioration across the industry," said Gerard Cassidy, a bank analyst with RBC Capital Markets. "We think there are hundreds of failures to come."
There are a few points to make about this data.
The total amount of assets on the problem list is $300 billion. This is not good, but it is not terrible either; the asset size is manageable. In addition, that assumes a 100% failure rate of the banks which is doubtful. In addition, consider this chart from Calculated Risk:
In short, we've been through far worse times when far more assets were a problem.
In addition,
The swelling of the problem list could be a harbinger of further industry consolidation, analysts said. Large, healthy banks, several of which have paid back their government-rescue funds, are "chomping at the bit" to buy failed lenders from the FDIC, and Thursday's report is likely to further whet their appetites, said Ed Najarian, head of bank research at International Strategy & Investment Group Inc. "They're looking at it as more opportunity to acquire banks."
We've seen the FDIC and government regulators do a lot of shotgun weddings in the banking industry. My guess is there are alot of phone calls going on right now to see who wants to acquire what bank.
The primary problem this situation creates is a decrease in lending as the economy moves forward. In actuality from the consumer's perspective this development couldn't happen at a better time as consumer loan demand is dropping. From the commercial side it's an issue and will probably hinder growth.
All this being said, this is a bad development. But so far it is a manageable disaster -- that is, between industry consolidation, an increase in loan loss reserves and the total amount of assets under pressure this situation can be dealt with. However, that could change it the situation continues to deteriorate.
2 comments:
The asset value on the chart does not include BofA or Citi, does it? Perhaps it includes Corus, which is a dead man walking, and Colonial and Guaranty, which the fed has already eated. Those three would be $50B of the asset value.
At the same time, if I was top management at a bank, then I would want to be acquiring as much as I can, too. The safe harbor is when your bank if TBTF. Compensation for the managers seems to bear no relation to profitability, but correlates with size/assets.
The FDIC has imposed special assessments and increased rates, but since the end of the 2nd quarter, it would appear to have depleted the DIF with its acquisitions since 7/1. Will rates and special assessments not have to continue? if so, it would not seem to bode well for the profitability of the multitude of small banks and their investors throughout the small towns and cities outside the money centers.
I saw this on CNBC: 1,000 Banks to Fail In Next Two Years: Bank CEO http://www.cnbc.com/id/32581463
Somewhere else I read that 1 in four banks were facing problems. This does not bode well when combined with the rising unemployment rate and amount of personal debt that people are underwater with.
And looking at the precious metal markets with the spot price widget http://www.learcapital.com/exactprice this morning it looks like investors are hedging in gold and silver right now as a means to protect their wealth.
We'll see what next week's numbers report but I am starting to be of the opinion that we have not seen the worst yet.
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