Academic

Bank Failures and FDIC Fund Losses

By Kim Krawiec

The bank failures are coming fast and furious (and large) now ? a poor blawger can barely keep up.  In my last post on bank failures, Bank Failures Update And Future Problem Banks, I noted that the total number of FDIC bank closures for the year was at 72, putting us on pace for an estimated 125-150 FDIC bank closures for 2009.

Since then, the FDIC has closed nine more banks, bringing the total for 2009 to 81. See here for the FDIC's full list of failed banks since October 1, 2000.  The FDIC has been seizing about 4 to 5 banks per week recently, putting us on pace for close to 150 bank failures for 2009.  See the chart at right, courtesy of Calculated Risk.  (Click on any chart to enlarge.)

Richard Bove, a prominent banking analyst, predicts that "perhaps another 150 to 200 banks will fail," on top of the 81 so far in 2009, adding stress to the FDIC's deposit insurance fund.  In the video below, Meredith Whitney predicts that, improved economic fundamentals notwithstanding, we are still early in the bank failures cycle, and will see bank failures top 300 before the end of this cycle (which Calculated Risk believes is too low an estimate).

The current pace of bank failures is causing some strain to the FDICs deposit insurance fund and to the financial system as a whole.  From Reuters:

Richard Bove of Rochdale Securities said this will likely force the FDIC, which insures deposits, to turn increasingly to non-U.S. banks and private equity funds to shore up the banking system.

"The difficulty at the moment is finding enough healthy banks to buy the failing banks," Bove wrote.

The FDIC is expected on August 26 to vote on relaxed guidelines for private equity firms to invest in failed banks, after critics said previously proposed rules were too harsh and would actually dissuade firms from making investments. . . .

Three large failures this year -- BankUnited Financial Corp in May, and Colonial BancGroup Inc, Guaranty Financial Group Inc in August -- collectively cost the fund roughly $10.7 billion.

The fund had $13 billion at the end of March.

Regulators closed Guaranty's banking unit on Friday and sold assets of the Texas-based lender to Banco Bilbao Vizcaya Argentaria SA. The FDIC agreed to share in losses with the Spanish bank.

Bove said the FDIC will likely levy special assessments against banks in the fourth quarter of this year and second quarter of 2010.

He said these assessments could total $11 billion in 2010, on top of the same amount of regular assessments. "FDIC premiums could be 25 percent of the industry's pretax income," he wrote.

This second graph from Calculated Risk shows the cumulative estimated losses to the FDIC Deposit Insurance Fund (DIF) and the quarterly assets of the DIF (as reported by the FDIC).  (The FDIC takes reserves against future losses in the DIF, and collects fees and special assessments - so you can't just subtract estimated losses from assets to determine the assets remaining in the DIF.)

In a prior post, Bank Failures in Historical Perspective, I compared the current pace of bank failures to the pace during the S&L crisis and the great depression.  At the current rate, bank failures in 2009 will outpace the early years of the S&L crisis. From 1982 thorough 1984 there were about 100 failures per year.  After that, the number of failures rapidly increased, as shown in this third graph, also from Calculated Risk.

As the chart demonstrates, bank closures were far more numerous during both the Savings & Loan Crisis and during the 1920s and early 1930s, before the FDIC was created in 1933.  For example, the number of bank failures is estimated at 4000 for the year 1933, and 500 bank failures per year was commonly seen during the 1920?s.  As I?ve noted in prior posts, the number of bank failures alone does not tell the whole story of distress from bank failures, which is a function of the total number of existing banks, the size of their assets and liabilities, the number of branches, and other factors. Nor do bank closures paint the whole picture of economic crisis ? in the current financial crisis, many of the most spectacular failures or bailouts have been of non-bank financial institutions.

To get at some of these questions, Calculated Risk has a List of Failed Banks since 2007, which includes assets and estimated losses.  Finally, for those wanting a peek into the future, see this unofficial List of Problem Banks.

Related Posts:
Bank Failures Update and Future Problem Banks

Full post as published by The Faculty Lounge on August 26, 2009 (boomark / email).