Thursday
28Aug
More Banks In Trouble
Thursday, August 28, 2008 at 05:43Courtesy of Financial Times:
The continuing deterioration in the health of the US banking system was highlighted yesterday when a leading regulator said the number of troubled institutions climbed by 30 per cent during the second quarter.
The Federal Deposit Insurance Corporation said the number of banks on its "problem list" had grown from 90 institutions at the end of the first quarter to 117 at the end of June - the highest figure since early 2003. The combined assets of struggling banks increased dramatically in the three months from $26bn (€17.8bn, £14.1bn) to $78bn.
Sheila Bair, chairman of the FDIC, warned that both trends were likely to continue. "More banks will come on the list as credit problems worsen," she said. "Assets of problem institutions also will continue to rise."
So, the number of "problem list" banks is at its highest point in 5 years, with more and--if you note Bair's comment that "assets of problem institutions will continue to rise"--bigger banks yet to come.
The FDIC said the IndyMac failure accounted for $32bn of the assets held by "problem" banks at the end of the second quarter and increased its estimate for the loss it would incur from the California bank's collapse from up to $8bn to $8.9bn.Oh, what's another billion? Well, it might get a bit tight at the old FDIC:
The FDIC guarantees deposits up to $100,000, and saw its reserve fund fall to $45.2bn at the end of the second quarter from $52.8bn at the end of March. The ratio of reserves to insured deposits fell from 1.19 per cent to 1.01 per cent, which is below the target level of 1.15 per cent and the lowest level since 1995. In October, the FDIC will consider implementing a plan to replenish the fund, possibly through higher insurance premiums for banks.
So, to recap: the number of "troubled banks" is at a five-year high , the FDIC's bailout reserve-against-obligations ratio is at a 13-year low, and the head of the FDIC warns us that more and bigger banks are due to hit the "problem list."
At what point do we step in with more decisive government action? Is there regulatory action which, taken now, can avoid (or minimize the impact of) additional bank failures?
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Reader Comments (5)
Automatically assuming that more government interference will improve things is not an idea based upon reason nor upon history.
Redbeard, please note that I asked questions; I didn't say "government jump in now!" Hey, if the potential answer is "there are no reasonable steps at this point," we can discuss that.
I'll put the high end of the bar at "if regulatory steps can prevent another Bear Stearns bailout or IndyMac receivership, such would be a good thing." Is that a decent starting point?
Question for those more knowledgeable than I: A passing comment in a later FT article mentioned that "most of the banks on the list are expected to recover." (No mention was made of how long such a recovery might require.) How frequently do banks move to and from the "problem list?" I was interpreting this as banks getting too close to the edge, but is there a different way of looking at this?
Here's one reason why I don't trust the government to fix this problem.
http://www.portfolio.com/news-markets/top-5/2008/06/12/Countrywide-Loan-Scandal
True enough, Machiavelli - corruption is the most bipartisan player in Washington.
I wonder, though, if simple things like restrictions on certain types of financial instruments (which could be done via regulation, not legislation) or requirements for larger 'cushions' might be in order.