Where Are the Bank Failures in This Financial Crisis?

by: Tim Plaehn September 01, 2008    
Tim Plaehn

Tim Plaehn

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

If you read the common Internet buzz concerning the current financial crisis you would get the impression that this is the worst crisis ever to hit the economy. Yet, on Friday the FDIC announced only the 10th bank failure for 2008. With over 8,000 banking institutions in the U.S., 10 failures seem a long ways away from a crisis. I decided to take a closer look at some of the data to see how “big” the banking crisis has become. Here are a few points I find of interest:

  • The 10 banks taken over by the FDIC had just under $40 billion of assets in total.
  • The total assets of the 10 largest banks in the U.S. is a combined $6 trillion.
  • Total assets of all 8,451 FDIC insured institutions is $13.3 trillion.
  • Percentage of failed assets, year to date, of total: 0.3%. Or written as a decimal: 0.003 of all banking assets were in failed banks so far this year.

In comparison, during the Savings and Loan debacle of the 1980s and early 1990s there were over 1,000 federally insured S&L’s dissolved. The Resolution Trust Corp. took down 747 institutions over 6 years, or a rate of 125 per year. The current situation is showing no signs of getting anywhere near those levels.

The current situation has most banks taking severe write downs on any asset that has any chance of being impaired. If these assets under-perform less than anticipated, many banks could be recouping the write downs as outsized profits in the next few years.

I know many believe we are just at the beginning of a major financial crisis in the U.S. I see a financial system where home prices peaked almost 3 years ago and the mortgage meltdown started in earnest over a year ago and we still have only 10 bank failures and less than 1/3 of 1% of banking assets taken over by the feds. I do not see failures accelerating this late in the game as the economy starts to recover and the housing market is showing signs of a pending bottom.

Disclosure: None

Related Articles

This article has 44 comments:

  •  
    Sep 01 03:24 PM
    on any asset that has any chance of being impaired.

    So *on any asset*? Please if banks are that strong why don't they price to market instead of moving stuff to level 3?. The reason more banks haven't failed is because on your face tax payer support. Housing bottoming? Are you this naive?
    Reply | Link to Comment
  •  
    Sep 01 03:53 PM
    the chicken littles are going to be so disappointed... guess they can keep renting and maybe the next one will supply them with the $25,000 house of their dreams.
    Reply | Link to Comment
  •  
    Sep 01 03:58 PM
    I guess it depends what you would call the Bear Stearns situation...they're a bank, and the US Gov had to step in and guarantee them, no it wasn't the FDIC but hey it's still my money. Fannie & Freddie are bank-like, too...
    Reply | Link to Comment
  •  
    Sep 01 03:58 PM
    Perhaps more than anything this lack of failures is due to a restructuring of the banking industry.

    In the S&L days, failures were regionalized due to the localized nature of S&L (indeed, even commercial) lending. There was little or no repackaging or tranching of loans. When a region saw a disproportionate number of loan defaults, may of the regional banks were in trouble.

    Consequently, the losses incurred by those institutions that failed were simply too big for them to swallow, given their relatively small size.

    Today, the same magnitude (more or less?) of losses is being absorbed by much larger firms, who are more well equipped to handle the write-downs and/or are deemed "too big to fail", either one of which keeps them in business.

    It's not to say that the losses, and consequent shaking of faith in the stability of the system, aren't still very serious.

    ...my two cents.
    Reply | Link to Comment
  •  
    Sep 01 05:34 PM
    I am so tired of people trying to call the bottom and telling us everything is fine. Listen to them at your own peril.
    Where are the bank failures? They are coming as soon as we run out of money to prop thme up.
    We are keeping interest rates below inflation to prop up the banks at the expense of the consumer. Enough already.
    Reply | Link to Comment
  •  
    Sep 01 05:50 PM
    During the first part of the S&L crisis from 1986 -1989 a total of 296 Savings and Loans failed with assets of $125 B (under the jurisdiction of the Federal Savings and Loan Insurance Corporation)

    FSLIC was replaced by the Resolution Trust Corporation in 1989 and from that point through 1995 and there were an additional 747 failures with assets of $393 B.

    I think there is merit in the comment above suggesting that FNM and FRE along with BSC should be factored into the equation. Here is a link to a recent article:

    www.reportonbusiness.c...=


    Source: www.fdic.gov/bank/anal...



    www.fdic.gov/bank/anal...


    Reply | Link to Comment
  •  
    Sep 01 07:03 PM
    I have a list of both private and publicly traded banks that may fail and go bankrupt over the next 3 years.

    You can view the lists at my blog.

    bankruptbanks.blogspot.../
    Reply | Link to Comment
  •  
    Sep 01 07:36 PM
    Since housing sales slow between September and April (when the kids are in school) its a bit premature to call a housing bottom. If housing sales are picking up why is everyone waiting to buy a house?

    Arctec, you better have some analysis backing up that list of yours because it looks like you just pulled some names out of a FDIC phonebook. Your blog doesn't give much analysis either. Big Brother is watching.
    Reply | Link to Comment
  •  
    Sep 01 08:12 PM
    We’re probably just getting warmed up. Banks are now entangled in several feedback loops.

    It’s getting much harder for banks to raise capital, which forced banks to liquidate more assets and so forces them to raise even more capital, and so on. Worse, as this crisis deepens, the need for banks to raise capital has actually increased.

    During this past year banks have actually increased their lending by 20% because of contractual obligations, but this won’t last because they have no choice but to reduce their balance sheets. So in reality the credit crunch is only beginning.

    Next, sector after sector is getting dragged into this massive deleveraging, not just banks. Housing is deleveraging and so is the consumer.

    This dance still has yet to play itself out.
    Reply | Link to Comment
  •  
    Sep 01 08:14 PM
    AS soon as the banks are forced to mark to market and FNM and FRE shareholders are wiped out, you will see plenty. Just wait.
    Reply | Link to Comment
  •  
    Sep 01 08:56 PM
    buyitcheap,

    Fannie and Freddie are an interesting case. Any bailout of Fannie and Freddie must be structured so as to NOT be categorized as a default which would trigger CDS payouts. Anything likely to trigger a widespread CDS claims event could possibly bring down the house, witness the "I just crapped my pants" reaction to Bear Stearns. But any bailout of Fannie and Freddie that does NOT wipe out shareholders will be hugely burdensome on the US taxpayer and carry a heavy burden of obvious and oh-so public "moral hazard".

    It's my understanding that the regionals et al were heartily encouraged to stuff their balance sheets with Fannie and Freddie debt, since after all they were "agencies" of the dot gov. So wiping out shareholders and giving a haircut to preferreds and senior debt could kill off the regionals, who are already on life support. So Paulson's challenge is to stuff a whole lotta dough into Fannie and Freddie without triggering defaults. Remember when the bailout seemed certain, and then all of a sudden: "Hey, maybe we won't need to bail them out, they might be OK after all!!" Someone realized the quandary.

    "Is that a bazooka in your pocket, or are you just glad to see me?"
    Reply | Link to Comment
  •  
    Sep 01 08:59 PM
    I'm a little hesitant about calling BSC a bailout. Really it was a government-supported takeover by JPM - the money came from JPM and the government just backed-up the deal without directly putting out cash. The only people who took losses were BSC shareholders (who were adequately informed of the risks of investing in BSC) and those who invested in BSC hedge funds (who probably weren't adequately informed of the risks, but should have known better than to invest in heavily-leveraged funds with minimal track records and little real hedging).

    FNM and FRE are a bit different, but at this point we know the common is probably wiped out (again, these holders knew the risks) and the debt is supported (as it should be, given that it's fairly low interest debt that has supported the common good of cheap mortgages). Remember that FNM and FRE hold pretty well-collateralized portfolios - even in a worst-case scenario the government just winds up holding a bunch of houses that it has to put on the market when the economy rebounds. Also remember that the seemingly huge asset price declines in housing and the stock market are just rolling us back to 2003-2005 levels, and there was no real fundamental reason for the run-up in asset prices during 2006-2007, so really the money everyone is losing is money that they didn't exactly have in the first place.

    Or the sky is falling! If that's more fun for you all....
    Reply | Link to Comment
  •  
    Sep 01 09:05 PM
    najdorf,

    Don't confuse what I WANT to happen with what I think MIGHT happen. Still trying to figure it out, just like the rest of us. One thing we can say for Bernanke, he has done a fine job of obfuscating the truth. If too many figured it out too soon, his ability to jawbone would disappear and he would become irrelevant.
    Reply | Link to Comment
  •  
    Sep 01 09:24 PM
    Yes, the sky is falling, but very slowly as the US gov. can put on a charade of cash here, underwriting there... Who's cash? Yours and mine, of course. They have to keep the interests rates low to keep any hope of a sustained economy, but at the peril of inflation. With a little luck they can extend the decline at least until the next president takes office (God help him). With alot of luck the whole world economy goes down with us and they can say "see it's not just us". At some point China will realize that hey those guys in the USA don't manufacture anything...they'll never be able to pay us back, lets redeem these T-notes and not lend anymore unless it's at a much higher rate! This is when we're really screwed! As far as this article though, even the real estate experts are saying maybe 2009 is a bottom, so where is he getting his info of "showing signs of a pending bottom" !!??
    Reply | Link to Comment
  •  
    Sep 01 10:46 PM
    In my view, I think the banks are playing this to their benefit. The Fed has bailed out many of these institutions more than we know....as low as 2% interest on loans to other banks? I am in no risk of defaulting on my mortgage, yet I am sure my mortgage company (Bank A), who got the money from Bank B two years ago at 6% now borrowed money from Bank C at 2% in order to pay back Bank A. I am still paying at 6%, so they are making a 4% profit off of me, instead of the 1% they were before (based on the 6% interest rate of my loan and the 5% interest rates banks charge each other at the time I closed on my house).

    That money does not find it's way to the home buyer, and those profits go straight to the banks, giving them no reason to try to re-negotiate loans that are ready to default. If they were still making the 1%, it would be best for them to renegotiate loans to avoid mass foreclosures. Sure they might make 0.5% as opposed to 1%, but that is better than losing 1/4 of a million dollars/foreclosure (Chicago suburban market values as a point of reference)

    Also, I don't see home values dropping that much. Every so often I check to see what homes are priced at, and a home that 2 years ago that would be priced at $250,000 is now priced at $240,000. Maybe it is the current owners, maybe it is the real estate agents, but for the interest rates rising, it can actually cost more to buy a home (given a 30 yr fixed interest rate) at today's market value, than it would have if you were to buy the same house 3 years ago at then market value.
    Reply | Link to Comment
  •  
    Sep 01 11:07 PM
    I think through this credit cycle many long-term investors will find that reality is balanced somewhere between maximum pessimism and maximum optimism concerning financial institutions. What an investor really has to focus on is individual equity risk and how much reward they anticipate receiving from investing their capital in these names. There are certain opportunities emerging where the market has cast all stocks with the same brush. We’ve seen failures, but none of the magnitude that many are raving about in the streets.

    One or two large failures is to be expected from this credit bubble bursting and a greater number of smaller regional institutions who got away from conservative operations will bite the bullet also. The risks are real, but the systemic risks to the system have been handled well enough to ensure viability of the sector and continue operations.
    Reply | Link to Comment
  •  
    Sep 01 11:18 PM
    LA Times print edition: just starting full page foreclosure adverts, 250+ bank-owned properties in one ad, bidding starts at < 100k on inland empire mansions. prime LA neighborhoods just beginning to roll over -West Hollywood condo @ 102K bid.

    yes, all clear, captain! full rudder toward the massive icy land mass!
    Reply | Link to Comment
  •  
    Sep 02 03:49 AM
    it the 'lection man. nuthin gon appen til after the 'lection!
    Reply | Link to Comment
  •  
    Sep 02 08:54 AM
    Gallaway is totally correct. The reason there have not been more bank failures is that they are being effectively given money.
    The Central Banks can't continue to pump money in forever, and the first one to crack is likely to be the ECB, as it is more difficult to pass losses on to the taxpayer when most of the cost will hit only some of the countries.
    Once one Central Bank stops the financing, the rest have to or their exchange rates would totally collapse.
    This will trigger the inevitable de-leveraging, as the banks will have to virtually cease lending to try to re-build their capital ratios, and house buyers will at best be able to get the traditional 2.5 times the main earners income instead of the up to 6 times both incomes at present.
    All this is going to throw vast numbers of people out of work, creating more legs down in prices and credit availability.
    Those who are calling a bottom seem to think that leveraging can increase forever.
    It is now pay-back time.
    Reply | Link to Comment
  •  
    Sep 02 09:09 AM
    Ok... I m not bank savvy... and I don't even remember how I got to this blog.... and I am making a total guess here.

    I think the reason banks aren't failing is become people are focused on ONE product banks offer (Mortgages). In recent years they've been able to get a strong on other revenue streams... Like debit cards, ATM fees, and other bank fees.

    So the bank takes your house...which you were paying under 10%... Now your credit is shot.... so now the bank is getting over 22% on everything else you own, car, credit cards,appliances.. and now the bank owns your house. Sounds like bank is making out. Granted a house would yield more profit for the bank after 10 years... but in the short term.... I m thinking the banks would be OK...as they make more off interest and then sell your house in 2 years.... maybe even back to you...LOL

    People say "The bank is not in the real estate game...they don't want to own houses".... How could they ignore the potential gain from holding onto these properties until the market goes up?
    Reply | Link to Comment
  •  
    Sep 02 09:09 AM
    lets try Fed.& Co to try control inflation and they are broke with USTB anywhere above 4%
    Reply | Link to Comment
  •  
    Sep 02 09:16 AM
    thanks artec for your great website.all that have not should check it out.
    Reply | Link to Comment
  •  
    Sep 02 10:25 AM
    LeVar Berry:
    The problem is the wonders of fractional banking reserves, where reserves have declined from 1:10 after the war to 1:60
    What that means is that if the Bank had $1 in deposits, it could lend out $10 after the war, or $60 now.
    Now if house prices drop 20%, and the borrower is in trouble, the bank might sell it for 40% less than they have out on loan to move it fast.
    If the bank had financed 24 houses, then to make up for it's loss if it was geared 10:1 it would have wiped out the capital to finance 4 houses.
    At 60:1 all your capital is gone.
    The same thing applies to bankrupt businesses.
    This is just to give you the rough idea, but the basics apply.
    Every bank in the country if losses were properly accounted for and the Fed was not supporting them is probably insolvent.
    Reply | Link to Comment
  •  
    Sep 02 11:59 AM
    The US is insolvent and the Fed is insolvent. Oh, I forgot. The Fed can print all of the money it pleases so by definition it can never go insolvent. And because the Fed can print all of the money it wants to the Treasury can sell all of the bonds it needs to raise all of the money the politician's want to spend so the US can never go insolvent. Is there something wrong with this picture that Ludwig Von Mises has not told us? Everything seems to be working just fine for the time being. Why worry about the future. Let's all grab some trading profits today.
    Reply | Link to Comment
  •  
    Sep 02 12:22 PM
    Better bank living through better book cooking. It is quite clear that there is still a lot of toxic stuff out there that is not seeing the light of day yet.

    The real question is whether you really can fool all the people all the time. I don't think so.
    Reply | Link to Comment
  •  
    Sep 02 12:34 PM
    One more thing. While lending standards are increasing rapidly in many cases, the home loans are still rolling out the door for 6% and change (cheap money), and there is still a fha jumbo loan program which will cover 97% (easy money). The reason the fha thing is still happening is that fannie and freddie have been told to treat this as a conforming loan.

    Soon fannie and freddie will be nationalized as they are currently insolvent. The taxpayer will demand that the cheap and easy money spigot be cut off because nobody really wants to subsidize a purchase of homes for rich people. That means real interest rates will go up in the market place for this jumbos. At the same time, fannie and freddie have a huge debt refi coming up in Q4 to the tune of 230 billion. Nobody is going to loan them money at 3% anymore. They will have to pay 7-8% at least IMO. That means fnm and fre can not lend that money out at 6% anymore. The debt refi will send fnm and fre over the edge and will be declared insolvent. Real interest rates have no choice but to go up. That hold true for money borrowed by consumers as well as that borrowed by banks.

    The explosion has gone off in the dam. The cracks have formed and the water is trickling through right now. Just give a little time for nature to take its course. The dam will burst, it just takes patience to watch for it.
    Reply | Link to Comment
  •  
    Sep 02 02:02 PM
    My best educated guess is that 1/10th of the banks are insolvent, but because the government is using taxpayer money to bail them out, (and using their "magic wand" to create digital funds for the banks), the public is believing a lie that they want to believe - that there is no crisis in the banking industry.. Go ahead - invest in banking stocks - and watch your money vanish before your very eyes.
    Reply | Link to Comment
  •  
    Sep 02 02:29 PM
    because of a lack of transparancy i think the toxic stuff is being acknowledged & written off in a slow purposeful way.i cant prove it but it seems that the longer it takes the less banks will fail.i guess they figure time is on their side.
    Reply | Link to Comment
  •  
    Sep 02 03:37 PM
    notsosmart, most of the directors are going to be right in there, hanging on as long as possible and picking up their so-called 'performance' bonuses and generous severance pay when the ponzi scheme collapses.
    The longer it goes on the better - the losses are being borne by the taxpayer anyway.
    Reply | Link to Comment
  •  
    Sep 02 04:38 PM
    LOL Arctec.
    Did you miss one?
    Reply | Link to Comment
  •  
    Sep 02 07:12 PM
    GEESH are you crazy

    BSC survived the GD...IMB largest implosion ever...we are at 11 and averaging one a week...FDIC is hiring and expanding...head of FDIC is asking to borrow money from treasury

    get ready buddy youll see them...in the meantime perhaps Kudlow will invite you in his show and you and dennis kneale can have a boooolish party celebrating your limited forsight
    Reply | Link to Comment
  •  
    Sep 02 08:59 PM
    is goldilocks invited to the kudlow party? i pay very little attention to any talking heads on tv. i watch about 5-10 min. & get a good laugh.
    Reply | Link to Comment
  •  
    Sep 02 09:00 PM
    d. martin-soooo right.