In 2009, the number of failures escalated rapidly — to 140, or nearly three banks per week. But the crisis was, in some sense, less severe than it was in 2008. The failures represented a much smaller chunk of the banking system than the Class of 2008 did. Between them, these banks had $137 billion in deposits and $167 billion in assets. The banks that failed in 2009 had median deposits of $234 million and an average of $965 million.As a banker, I often review bank balance sheet data and talk to friends at other banks to get a sense of the health or lack there of within the banking industry. The idea of the worst of it is behind us for the banking industry is nothing short of laughable.
When banks fail, the FDIC tries to find new buyers to take over the banks' operations and assets. The FDIC frequently enters into "loss-sharing agreements," in which the new acquirer and the FDIC split a chunk of the future credit losses from failed banks. As a result, asset prices and the terms on which banks are willing to invest in failed banks can affect the ultimate cost to the FDIC deposit fund. For much of 2009, when markets were suffering and the banking industry was on its back, competition for busted banks was quite low. So the 140 failures caused the FDIC's deposit insurance fund to absorb $37.4 billion in losses. The typical (median) failure cost the insurance fund about $73 million.
In 2010, the pace of bank failures has picked up. With 11 weeks left in the year, 129 banks have already failed. (This year's list of losers can be seen here.) So it is likely more banks will fail in 2010 than did in 2009. But those banks represent a much smaller chunk of the banking sector than the Class of 2008 or 2009. Combined, this year's dead banks had just $72.4 billion in deposits and $84.2 billion in assets. The median deposit level of a failed bank in 2010 is $264 million and the average is $560 million. Meanwhile, with surviving banks returning to health, and new capital entering the industry, competition for banks taken over by the FDIC has risen.
The end result: bank failures have become cheaper. By my calculations, failures have cost the FDIC deposit insurance fund about $20.15 billion so far this year. The cost of a typical (median) 2010 failure to the insurance fund is $58.9 million, down nearly 20 percent from 2009, and down 60 percent from 2008. And that's falling. Go take another look at the list of 2010 failed banks. The largest and most expensive failures came in the first few months of this year. Since July 1, there have been 43 bank failures, with the biggest being Shore Bank in Chicago. Combined, their failures have cost the deposit insurance fund just $2.5 billion, or about $41.4 million for a typical failure.
Don't get me wrong. This year will still turn out to be a debacle. As these statistics show, at the end of June, there were 829 institutions with $403 billion in assets on the FDIC's "problem institutions" list. That compares with 702 institutions with $403 billion in assets at the end of 2009. After having set aside funds in advance to make depositors whole for anticipated bank failures, the deposit insurance fund had a negative balance of $15.2 billion in June 2010. But that's an improvement from the end of 2009. (The FDIC has replenished the funds available to make good on deposit insurance by levying a special assessment on banks in the fall of 2009 and by collecting three years of assessments in advance at the end of 2009.) But the Friday-night data flow suggests that the size — and impact — of failed banks is shrinking.
Daniel Gross is economics editor and columnist at Yahoo! Finance.
1) Commercial Real Estate Implosion.
Commercial real estate trends usually lag residential and that is exactly how it's played out this time. The bank losses coming from commercial real estate loans are just beginning to hit banks. For months, building owners used cash to cover short falls in rent, then they started going delinquent on loan payments because they depleted reserves, and banks tried to renegotiate terms in hopes a property owner could rectify the loan or sell the property.
Unfortunately, there are too many property owners who have waited too long and are upside down. There are too many loans on commercial real estate buildings just coming to the light of distress or foreclosure. The wave of losses for banks is just getting started. And if the residential market is any guide, we have at least 2-3 more years of financially distressed commercial real estate for banks to deal with, which means more losses.
2) Along the idea of just beginning is the loss on commercial loans to businesses or business owners: Lines of credit and term loans usually secured by the assets of the business. While these loans are usually smaller than real estate loans, there is a greater propensity for relatively larger losses due to the collateral. Business assets get sold at much deeper discounts than real estate in a distressed situation.
There are still too many businesses that are on the verge of going under. They used their cash or owners cash to survive and have depleted their resources. Now banks are trying to work with them and there's no cash or assets to bring to the table, and if cash flow drys up, the bank will eat losses on this type of loan. And just like Commercial real estate, there are plenty of commercial loans ready to provide banks more losses.
3) The number of banks we have closed down since 2008 represents about 4% of the slightly more than 8,000 banks at the beginning of 2008. That's a tiny number and in aggregate it's far smaller than the 829 banks on the FDIC troubled bank list. We will close far more banks than we currently have in the coming years, the only question is how fast can we do it based on the man power and resources of the FDIC.
My estimate is for roughly 2,000 to 3,000 banks in total will get closed down or merge into other banks.
4) The other issue that rarely gets discussed is the notion that it seems like the FDICs plan to close down smaller banks and hand them off to larger banks. We are in essence continuing to create more of the too big to fail institutions, and if there's another systemic issue coming, we could see larger banks become insolvent.
5) What's most dangerous is another down move in residential real estate values. If the national real estate market were to decline by 15-20% the number of bank loans becoming upside down will grow exponentially and again put far more banks at risk. A correction of 15-20% is very doable because there are still too many markets over valued with declining sales activity (demand) plus the newest nightmare of the foreclosure process probes.
The analysis behind the idea of the worst is behind us for the banking industry is not something I agree with at all, in fact, I think it's a weak idea at best. If we scratch below the service and understand current and potential trends we have dangerous times ahead of us for banking.
The banking industry will end up like the construction industry, at some point it gets purged of weak players in a massive fashion because there are too many banks given the economy in a deleveraging environment.
It's just math.
Hope all is well.
J.D. Rosendahl, Rosey