Thursday, July 29, 2010

Grim Milestone: Bank Failures Reach 100 for Second Consecutive Year

On Friday, seven more US banks failed, brining the total to 103 this year. It marked the second consecutive year that bank failures exceed 100.

Since the creation of the FDIC in 1933, there have been only 12 years in which 100 banks have failed in a single year.

And we've just experienced two of them in a row.

The pace of bank failures this year is well ahead of last year, when 140 banks were shuttered. That marked the highest number of closures since 1992, during the height of the savings and loan crisis.

It seems that there are still many more failures to come; by the end of the first quarter, the number of lenders on the FDIC's "problem" banks list had climbed to 775, the highest since 1992.

The banks on that list are most likely to fail, yet their names are never made public out of a fear of creating a run on those banks.

Bank failures over the past two years pushed the number of FDIC institutions to below 8,000 for the first time in the agency's 76-year history. Two decades ago, the FDIC insured more than 16,000 institutions nationwide.

The FDIC has been desperately trying to raise capital from the banks to deal with the flood of failures. The problem is that many of these banks are already under-capitalized, hence the reason they are failing.

The government changed accounting rules for banks during the financial crisis so that they no longer have to mark the properties they've foreclosed on to market values. Banks have been allowed to "extend and pretend," as they await the housing market to recover. That could take many years.

If they had to mark these "assets" — which at this point could be more accurately described as liabilities — to current market values, even more institutions would be revealed as bankrupt.

As the commercial real market continues to falter, and more loans go bad, the losses at banks will become overwhelming. And there is a good chance that US taxpayers will end up footing the bill for these failures, as well as the bad loans that are causing them.

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