It's a tough time to be a small banker in America these days.
While the finances at the country's biggest banks have largely stabilized — thanks in large part to government bailouts — smaller regional and community banks are continuing to fail at an alarming rate.
Eighty-one banks have been shuttered so far this year by the Federal Deposit Insurance Corp., and many more failures are expected in the coming year. On the past five Fridays alone, 23 failed banks were shut down by the FDIC, and analysts expect the FDIC to announce new closings Friday.
The FDIC said Thursday that amid mounting losses at banks, it added more than 100 banks to its list of "problem" institutions in the second quarter of this year, raising the total to 416.
The government was well aware these banks were going to fail a year ago, but couldn't do anything about it. There will be an acceleration of the failures to reflect not what's happening today, but what happened a year ago that nobody did anything about.
Most of these are small banks with less than $1 billion in assets. Many are saddled with large amounts of bad loans, including subprime loans, but they are now being pushed further under by the protracted economic downturn.
"While the early losses were related to residential loans and complex mortgage-related assets, where the crisis really began, we're now seeing problems with more conventional types of retail and commercial loans that have been hit hard by the recession," says Sheila Bair, the FDIC chairwoman.
Not Too Big To Fail
These problems have been building for months. Early on in the financial crisis, FDIC officials concentrated more heavily on large banks that were troubled. In recent months, they have focused more heavily on smaller banks.
"The government was well aware these banks were going to fail a year ago, but couldn't do anything about it," says Richard Bove, a leading bank analyst at Rochdale Securities, who predicts that another 150 to 200 banks will fail in the next 12 months. "There will be an acceleration of the failures to reflect not what's happening today, but what happened a year ago that nobody did anything about."
The process of closing a bank requires large teams of FDIC officials, which limits the number that can be closed each week.
But the FDIC's pace is picking up. "We know that there is a backlog of these to be cleared out," says Dennis Santiago, the CEO of Institutional Risk Analytics in Torrance, Calif. "It's primarily driven by the amount of staff the FDIC has."
Problem Looming Larger
As the recession's effects continue to ripple through the economy, and more people default on home and commercial loans, a growing number of banks could be at risk.
Dennis Santiago, the CEO of Institutional Risk Analytics in Torrance, Calif., says about one-fifth of the nation's 8,100 banks have "high stress levels," mostly because they hold large numbers of troubled home loans. A significant number of them, although not all, are at risk of failing in the coming year.
The good news, however, is that these bank failures happened quietly, with no disruptions or even long lines of customers waiting to withdraw their funds.
"One reason we're seeing these failures is that the government is comfortable letting them fail," says Frederick Cannon, the co-director of research at Keefe, Bruyette and Woods, a financial services firm. "People are comfortable having their deposits at banks, even if they fail, because they are confident about the FDIC guarantees."
Strained Deposit Insurance Fund
But the costs are mounting. The FDIC announced that its reserve insurance fund to cover deposits at failed banks shrunk by about $2.6 billion to $10.4 billion in the second quarter of this year.
"The problem is not that banks are going to fail, but that someone has to pay for the failures," Bove says. "The healthiest banks in the country will be hit with a huge premium to pay for the ones that have been helped."
The FDIC is not in any danger of running out of money, because it can borrow up to $500 billion from the Treasury Department, but it will have to charge higher fees to banks for the next several years to replenish its own reserves.
It remains unclear whether small banks will receive any significant government aid.
The FDIC's Bair points out that the Treasury Department's bailout program, known as the Troubled Asset Relief Program, was largely geared toward helping the biggest banks.
She adds that the FDIC has been consulting with Treasury officials to "try to figure out how TARP can help smaller institutions." Until then, the number of closings will continue to mount.
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