Seven more US banks were shut down by regulators on Friday, bringing the total for this year to 106. It's the most closings since 1992, when 122 banks were shuttered.
Yet, it's only October.
The occasion also marked just the 11th time since the creation of the FDIC in 1933 that 100 banks have failed in a single year.
To provide some perspective, just three US banks failed in 2007.
And last year, 25 US banks were closed, which was more than in the previous five years combined.
But this year the problems in US banking have been growing steadily worse; a total of 416 banks were on the FDIC's troubled list as of the end of June.
With more and more mortgages continually going into default, those numbers are expected to steadily rise over the next couple of years, putting ever greater pressure on the entire US banking system.
However, this doesn't even account for the looming fallout in commercial real estate failures.
Investors in commercial mortgage-backed securities are holding assets with a delinquent unpaid balance of $29 billion, up more than five fold since June 2008, according to a report issued by the Congressional Oversight Panel.
Under a worst-case scenario, the panel estimates that commercial real estate and construction loan losses through 2010 may total $81.1 billion at 701 banks with assets of $600 million to $80 billion.
Consider the implications of that scenario; the potential losses could exceed the total assets of the banks involved.
According to Jim Rounds, senior vice president and senior economist at Elliott D. Pollack, the problems in commercial real estate are just getting started and they will hinder any possible economic recovery.
The resulting losses, on top of the already heavy losses in residential real estate, will be devastating.
Veteran bank analyst Gerard Cassidy of RBC Capital Markets expects as many as 1000 banks to ultimately go bust. And the money to cover those losses doesn't exist at present.
As of March 31, the FDIC's deposit insurance fund had $13 billion to cover pending bank losses. However, the agency has shelled out more than $25 billion to pay for all the bank failures so far this year. That meant the insurance fund that allegedly insures your accounts was officially in the red.
As a preventative measure (as futile as it may be), the FDIC's board took an unusual step on September 29, asking banks to pay $45 billion in fees up front. The money was to have been paid over three years. But the FDIC is in dire straights, so it has resorted to rather desperate moves.
The $45 million in fees amounts to putting a band-aid over a bullet wound. The FDIC purports to insure $4.83 trillion in deposits. Does $45 billion seem adequate for the task?
At the end of 2008, the FDIC expected bank failures to cost its insurance fund around $65 billion through 2013, up from an earlier estimate of $40 billion. However, its problems have grown continually worse. As a result, the FDIC keeps revising it cost estimates ever higher.
The agency now expects to spend $100 billion on bank failures in the next few years.
However, analyst Andy Laperriere, Managing Director of the ISI Group, thinks that's a lowball number.
"I think the FDIC is going to continue to increase their estimated losses and this short-term measure of having the banks pay their fees up front probably is not going to hold us over through this cycle of bank failures. And I think ultimately, the FDIC is probably going to have to go to the Treasury and ask for a loan."
Due to their massive losses, US banks have a diminished capacity to increase lending, which will affect any recovery. According to the IMF, in both 2009 and 2010, US banks will have a negative lending capacity of approximately 3%.
And bank losses will only worsen.
Nationwide, there are 2.8 million active interest-only home loans, worth a combined total of $908 billion. In the next 12 months, $71 billion of interest-only loans will reset. Even after mid-2011, another $400 billion will reset. For instance, in 2004, nearly half of all buyers in California took out an interest-only loan.
That means there will be a massive number of additional defaults over the next two years.
And banks will continue to fall like dominoes as a result.
History and context of bank failures:
- In 1930, 1300+ banks failed, 600 in just the final two months of the year.
- During the savings-and-loan crisis (1986-95), 2,377 banks failed.
- In 1989, 534 banks were closed, the most since 1934.
- According to the FDIC, since 1934, the only two years with no bank failures were 2005 and 2006.
- From 2000=2007, only 32 US banks failed.
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