Besides big banks, the US government must make special provisions for smaller regional banks to protect them from failure
The US banking system is marred by what you could probably term as the ‘dichotomy syndrome.’ On one hand, the government advocates the ‘Too big to fail’ phenomenon by helping large financial institutions by means of government bailouts; while, on the other hand, smaller regional banks continue to struggle. Regional banks have been hard hit as plummeting home values, devalued mortgage backed assets and rising unemployment rates led to an increasing number of consumers defaulting on their loans. While the reasons are varied, the fact is that bank failures appear to have become more of a norm rather than an exception in the US; and the rate at which the banks are failing vindicates the same statistically. In the year 2008, there were 25 such cases of bank failures, while this year has seen an alarming 52 failures till date (that amounts to an average of 7 bank failures per month). Regulators fear that bank failures could rise above ‘historical norms’ as a weakening economy puts pressure on badly underwritten loans, particularly in commercial real estate. RBC Capital Market has candidly stated in its report that as many as 1,000 US banks could fail in the next three to five years on losses related to commercial real estate loans. Further, according to Ross Waldrop, Sr. Banking Analyst, Division of Insurance and Research, Federal Deposit Insurance Corporation (FDIC), “the number of insured banks and thrifts on the FDIC “Problem List” has increased from 252 to 305 (the highest since 1993), and total assets of “problem” institutions rose from $159 billion to $220 billion.” An analysis of the deposit insurance fund (DIF), too, reveals some startling facts. The DIF has decreased by 24.7% primarily due to the $6.6 billion increase in loss provisions for actual and anticipated insured failures. As a matter of fact the DIF ratio, too, has come down to 0.27, thanks to $9.5 billion worth of bank failures in the very first quarter of 2009 at an estimated cost to the DIF of $2.2 billion. It is estimated that US bank failures through 2013 may cost $70 billion (for this year alone the total cost for failed banks has risen to $12.3 billion). As economic recovery is still far off, many more such entities will collapse in the coming months and perhaps beat the 1989 landmark (with 531 bank failures).
The US banking system is marred by what you could probably term as the ‘dichotomy syndrome.’ On one hand, the government advocates the ‘Too big to fail’ phenomenon by helping large financial institutions by means of government bailouts; while, on the other hand, smaller regional banks continue to struggle. Regional banks have been hard hit as plummeting home values, devalued mortgage backed assets and rising unemployment rates led to an increasing number of consumers defaulting on their loans. While the reasons are varied, the fact is that bank failures appear to have become more of a norm rather than an exception in the US; and the rate at which the banks are failing vindicates the same statistically. In the year 2008, there were 25 such cases of bank failures, while this year has seen an alarming 52 failures till date (that amounts to an average of 7 bank failures per month). Regulators fear that bank failures could rise above ‘historical norms’ as a weakening economy puts pressure on badly underwritten loans, particularly in commercial real estate. RBC Capital Market has candidly stated in its report that as many as 1,000 US banks could fail in the next three to five years on losses related to commercial real estate loans. Further, according to Ross Waldrop, Sr. Banking Analyst, Division of Insurance and Research, Federal Deposit Insurance Corporation (FDIC), “the number of insured banks and thrifts on the FDIC “Problem List” has increased from 252 to 305 (the highest since 1993), and total assets of “problem” institutions rose from $159 billion to $220 billion.” An analysis of the deposit insurance fund (DIF), too, reveals some startling facts. The DIF has decreased by 24.7% primarily due to the $6.6 billion increase in loss provisions for actual and anticipated insured failures. As a matter of fact the DIF ratio, too, has come down to 0.27, thanks to $9.5 billion worth of bank failures in the very first quarter of 2009 at an estimated cost to the DIF of $2.2 billion. It is estimated that US bank failures through 2013 may cost $70 billion (for this year alone the total cost for failed banks has risen to $12.3 billion). As economic recovery is still far off, many more such entities will collapse in the coming months and perhaps beat the 1989 landmark (with 531 bank failures).
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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