Most American economists and the big end of Wall Street are ignoring the increasing failure rate among American banks, such is their desire to glimpse the bottom of the recession.
On Friday, five small local banks failed across the US; four were shut, one was sold off in the bloodiest day in US banking for years. That took this year’s total bank closures to 45, up from 25 in all of 2008 and just three in 2007. More banks have failed so far this year than in the last three years in the US, and 2009 is on track for well over 100 failures.
The cost to the key regulator, the Federal Deposit Insurance Corporation (FDIC), of Friday’s failures was around $US1 billion, which is not a lot of money compared to the size of the rescues and state aid to the Wall Street lone rangers. At that end of the market it’s getting close to business as usual.
Using the cheap money provided by the Fed (0.25% cost), the JPMorgans, Goldman Sachs and Morgan Stanley are off hiring staff, paying big salaries, playing the markets, funding hedge funds and generally acting as if the December quarter and their near death experiences didn’t happen. For Bank of America and Citigroup, times are not as carefree, but they safe from collapse at their own hands.
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Things are not so buoyant at the Community Bank of West Georgia, in Villa Rica, Georgia; Neighborhood Community Bank of Newnan, Georgia; Horizon Bank of Pine City, Minnesota; MetroPacific Bank of Irvine, California; and Mirae Bank of Los Angeles. All were closed yesterday by state regulators. Statements posted on the website of the Federal Deposit Insurance Corporation listed the failures.
The 45 failures for the first half of 2009 are 11 times more than the number for the first half of 2008. (More US banks failed on Friday than in all of 2007.)
In 2008, 25 US banks were seized by officials, up from only three in 2007.
In fact in the 12 months to June, 66 US banks have failed, including the largest failure in US history, Washington Mutual.
The financial crisis has taken a heavy toll on small banks across the nation as losses in the housing market mount and unemployment dents household wealth. Analysts expect the trend to continue even as larger banks stabilise and the overall economy begins to recover.
So far this year, nine banks in Georgia have failed and there have been five in California.
The cost of the 45 failures so far this year is $US11.89 billion. That compares with $US17.6 billion in all of 2008.
But the problems are not confined to the US. Friday night also saw the Spanish Government reveal a 90 billion euro ($A157 billion) bailout plan. That came a week after Moody’s downgraded or put on credit watch negative 30 banks and financial groups, including the country’s big two, Santander and BBVA.
Russia started talking about a $US100 billion (around $A120 billion) bailout of its biggest banks, the European Central Bank contributed a record 442 billion euros to the eurozone banking system to keep it flush with money and the Bank of England warned that financial groups remain vulnerable to another shock, despite the improvement in conditions in the markets.
In Japan Citigroup was banned from engaging in retail baking activities for a month over poor record and account keeping, which contravened an order from the country’s regulators four years ago. And the troubled Swiss giant, UBS, warned of a second quarter loss and raised another $A4 billion in fresh capital to meet the impact of that second quarter red ink.
All these developments underline that the risks to the financial system and the stuttering emergence of better economic signals, remains hostage to the health of banks, large and small.
In the UK, The Bank of England has warned that financial institutions’ losses from the crisis have left them vulnerable to another wave of shocks, including the risk that the economy will stay mired in recession.
“Given their leverage and funding positions, banks in the United Kingdom and internationally will remain sensitive to further shocks for some time,” the central bank said in its Stability Report. “If economic recovery were to stall as a result of weak bank lending, losses on assets could rise, further affecting confidence in the banking sector.”
The report also makes suggestions on regulation changes including greater capital buffers for institutions days before the UK Treasury unveils its own proposals for a revamp this week.
“Banks’ balance sheets remain sensitive to any setbacks in recovery in financial markets or real activity,” the bank said. “The economic downturn is still perceived by market participants as the highest risk to financial stability.”
The Treasury, the B of E and the Financial Services Authority are engaged in a turf war for control of the banking system that the previous Blair Government (With current PM, Gordon brown as Chancellor of the Exchequer, driving it) split up.
That split looks like being maintained and the FSA and the Treasury will be allowed to oversee the banks, (which means the same two groups that ignored and poorly regulated the banks, allowing them to explode the financial system and the economy) will remain in control. The Brown Government is determined to maintain political control over the banks, which has already cost the government much popularity because of inadequate and incompetent regulation. The FSA turned a blind eye to every abuse and rort and did nothing.
The almost certain defeat of the Brown Government at next year’s election in the UK means the issue of bank control won’t be settled for at least two years.