Banking on failure

 

When is an increase in hiring a bad thing?

When it’s being done by the FDIC.

The Federal Deposit Insurance Corp., those folks who insure deposits up to $100,000, last week said that it was seeking to add 140 workers to bolster the department that handles bank failures.

Chalk another problem up to the subprime mortgage debacle that continues to pull more and more into its drowning pool.

There were 76 FDIC-insured commercial banks and savings institutions on what the agency calls its “problem list” at the end of 2007. Their combined assets totaled $22.2 billion. At the end of the third quarter, there were 65 banks with $18.5 billion on the list.

The fourth-quarter net income of $5.8 billion was the lowest amount reported by the industry since the fourth quarter of 1991, according to the FDIC’s Quarterly Banking Profile. Incidentally, that $5.8 billion was down a whopping 84 percent or $29.4 billion from the fourth quarter of 2006.

And we’re still not officially in a recession? Give us a break.

Additionally, since the start of this year, two banks have failed; Douglass National Bank and Hume Bank, both of Missouri. And while the two Missouri banks may have been small, with $53.8 million and $13.6 million in deposits respectively, 33 accounts exceeded the FDIC’s insurance limit, leaving their depositors out in the cold, aka “creditors of the receivership.”

The closings bring the total number of failed banks over the past 13 months to five. Locally, it’s been four years since Reliance Bank of White Plains with $30.3 million in assets and $28 million in deposits failed on March 19, 2004. Orangeburg-based Union State Bank ended up taking over the bank.

The hardest times for banks was during the recession of the early 1990s, when 502 banks failed over three years.

Earlier in the month, FDIC Chairman Sheila Bair told the U.S. Senate’s Committee on Banking, Housing and Urban Affairs that “the vast majority of institutions remain well-capitalized, which will help them withstand the difficult challenges in 2008 until broader economic conditions improve.”

But, she said things look better today than at the end of 1991 when 1,430 banks were on the “problem list.” And while earnings last year were $105 billion, down 27 percent from 2006, the figure still was above the $100 billion mark for the sixth year in a row.

However, she is a realist pointing to the increase in foreclosures and past-due loan payments. And, as always, there’s a rub. “The problems in the residential mortgage markets have spread to other credit markets and are limiting the flow of credit to other sectors of the economy,” she said.

And then the domino effect comes into play.

Bank loan demand will be further slowed because consumer spending has slowed because the previous year’s large home price increases that spurred equity loans and thus spending has come to a crawl as home prices have decreased.

“It would be safe to characterize the operating environment of the banking industry during the coming year as one of significant challenge,” Bair said.

Reading between the lines of her testimony, the banks at greatest risk are the small and mid-size ones that have large concentrations of construction and development loans.

Bair’s testimony to the Senate committee may have been foretelling in light of last week’s announcement. She concluded by saying, “The FDIC is prepared to move promptly to handle any bank failures that may occur.”

She said there are lessons to be learned, such as returning to fundamentals. “The industry and its customers also will benefit from an emphasis on proven standards and the importance of adequate capital.”

That should be read as doing your due diligence before handing out money to just anyone.

Let’s hope the lessons are remembered in the future, for as George Santayana wrote, “Those who cannot remember the past are condemned to repeat it.”

 

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