Friday, April 3, 2009

Failed bank list surprises: consolidation?

The number of (or lack of) banking system failures in 2008 and 2009, 46 total, is shocking: world bank losses near $1.3 trillion (source: Bloomberg); the U.S. economy enters its 16th month of recession; default rates surgeg (from student loans and credit cards to mortgages and corporations); and the G-20 Leaders move forward on tightening global financial regulation .

In shoring up the banking system, the Fed and the Treasury likely enabled the economy to skirt a depression-sized disaster. However, since there are so many banks left standing - in a perfectly efficient situation more would have fallen by now (i.e., Citi) - there is probably still a long way to go on the road to recovery. Consolidation is likely inevitable. This is inefficient, and government intervention is using resources to push aside a natural market response: the consolidation of the banking industry.

Update: This chart has been slightly modified since its original version. For details, send me an email.

The chart illustrates the number of FDIC-insured commercial bank failures and the magnitude of those failures, as measured by the population. In the Great Depression, the number of commercial bank failures peaked at 70 in 1938; and during the saving and loan crisis, the number of failures hit 206 in 1988. However, according to the size of the population, the magnitudes of the commercial bank failures in 1934 and 1988 were more similar in size (clearly, the economic response was not).

In 2008 and 2009, the banking system has averted mass closure with the various government intervention efforts, where only 46 banks total have failed - minuscule compared to the previous two crises. Massive government interventions are pushing back banking reform; and in its effort to preserve the financial system, the consolidation of the banking system is inhibited by allowing weak banks to survive.

The market response requires consolidation - wonder when that is going to happen.

Rebecca Wilder

P.S. A list of the bank failures in 2008 and 2009 by name. This information is on the FDIC's website:

78 comments:

  1. This reminds me of Japan:

    Banks had over-extended themselves in financing the excess fixed capital of firms.

    When the credit-asset bubble burst in 1990, banks refused to write down losses and propped up companies that refused to fail.

    The excess supply and the resources tied up in them led to deflation and low growth.

    Deflation, low growth, and the risk of currency appreciation forced Japanese households to hoard Japanese corporate bonds - and thereby forestall the inevitable consolidation of corporations and firms even further.

    It also led eventually to qualitative easing, a ballooning government debt, "building roads to nowhere," an increase in the money supply, its effective sterilization by corporate bond issuance and hoarding of printed scrip by the banks, more deflation & increased buying power of hoarded scrip, more qualitative easing...

    One might ask how long such a process could continue. If the deflationary forces and the monetary & fiscal process described above were to push inflation and the yield curve to 0%, the answer is until monetary and fiscal policy change. It was the fiscal tightening in Japan during 2001, for example, that finally broke the cycle above and forced some of the banks to consolidate. This story is captured quite well in the St. Louis Fed's International Economic Trends data on Japan: http://research.stlouisfed.org/publications/iet/.

    One might further ask what might be the best way to make money in such a monetary liquidity trap. Paradoxically, the best way to do this might be to become a retail bank that accumulates a portfolio of fixed rate loans in sectors that will be protected by taxpayer bailouts. Assuming that the low economic growth in the US does not lead to political &/or economic problems abroad, there may be opportunities in foreign markets as well.

    ReplyDelete
  2. Rebecca !

    What do you mean by consolidation? That Banks need to merge and get bigger? Too big to fail and too big to save?

    You are about the only economist I have read, advocating such a solution.

    Or are you just noting an inevitable trend, due to political realities?

    ReplyDelete
  3. Hi Farrar,

    Thanks for stopping by! It seems that way, but too big to fail is not a consequence of a merger, it is a consequence of a lack of regulation within the business types. AIG is too big to fail, not because of its insurance arm (which is big), but because of its position in the CDO market.

    Of course there should be some industry consolidation! The financial industry (including part of the banking system) is probably going to shrink, it got too big. And just because a merger occurs does not mean that a bank is going to turn into Citigroup, being too big to fail. By supporting the banking system with such a large resource base, the government is preventing the takeovers of weaker banks that should fail. Clearly, the government needs to regulate against an AIG/Citi situation, which includes beefing up the FDIC; but in the grand scheme of things, AIG and Citi are more of an exception rather than the rule. Look at the asset base of the top 50 banks (http://www.ffiec.gov/nicpubweb/nicweb/Top50form.aspx): Citi is number 2 with $1.9 trillion, there is discrete jump downward from #4 to #5 to $435 billion, and the 37th through 50th top banks in the whole U.S. have less than $20 billion in total assets.

    Rebecca

    ReplyDelete
  4. Mergers are unlikely, first the ability to fund is not easy anymore.

    First some Banks dont even know what they are holding, due quaint packaging. Pools of investments and now determining the water droplets one by one. Plus with all the layoffs the defaults will only increase. The first tactic is changing the label in accounting rules. Check out CFO.com good article in changes http://www.cfo.com/article.cfm/13431434?f=search

    and

    http://www.cfo.com/article.cfm/10518040?f=search.

    Back to the subject, 2007 (by mid year) had record breaking numbers of mergers, drying of credit after 4.7 trillion in mergers was of course the result. Plus this recession wont make them very fruitful anytime soon.

    There is a really good working paper that I think you might be interested in, "Systemic Banking Crises: A New Database" Luc Laeven and Fabian Valencia from the IMF. Lists most banking crises since 1970 and there consequences and government reaction.

    ReplyDelete
  5. I am not stating that its not happening, just it seems some have to have arms twisted and tangled to get it done. (Chase with WAMU) But Chase has entry into California, so not to bad.


    http://www.cfo.com/article.cfm/13172499/2/c_2984297?f=search

    ReplyDelete
  6. So, how did you get that list?


    http://www.bloomberg.com/apps/news?pid=20601087&sid=aR_08gAhnr0A&refer=home

    ReplyDelete
  7. Hi ladyverano,

    Thank you for the links. I have read the IMF paper; it is very comprehensive.

    Regarding the FDIC data, I use the number of FDIC-guaranteed commercial banks that have failed.: http://www2.fdic.gov/hsob/HSOBSummaryRpt.asp?BegYear=2009&EndYear=1934&State=1

    The full list, which includes saving and loan institutions and other bank thrifts (affects the number in the 1980s), can be found here: http://www2.fdic.gov/hsob/HSOBSummaryRpt.asp?BegYear=2009&EndYear=1934&State=1

    The most current list is here: http://www.fdic.gov/bank/individual/failed/banklist.html

    Thanks for stopping by, Rebecca

    ReplyDelete
  8. 2 more banks failed this week.

    50 banks failed since 2008, 25 each in 2008 and 2009 till now.

    Friday means FDIC is in action on some bank.

    Last week also FDIC closed 2 banks.

    "American Sterling Bank,Sugar Creek, MO" and "Great Basin Bank of Nevada, Elko, NV" were closed on Friday making the count to 25 for this year and 50 since start of 2008 for the failed banks in US.

    # 25th bank to fail this year
    # 50th bank failed since 2008
    # 5th bank in Nevada since 2008 and 2nd this year

    Check the list of all the failed banks at :

    http://portalseven.com/Failed-Banks-2009

    And on google map see where the banks are failing at :
    http://portalseven.com/finance/Failed_Banks_Map_2009.jspAlso layoff tracker at :
    http://portalseven.com/finance/FinanceHome.jsp
    Do check it.

    ReplyDelete
  9. Thanks for stopping by! It seems that way, but too big to fail is not a consequence of a merger, it is a consequence of a lack of regulation within the business types. AIG is too big to fail, not because of its insurance arm (which is big), but because of its position in the CDO market.

    http://www.drooin.com
    http://www.pashubajaar.com

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