Friday, September 12, 2008

We're Still A Long Way From a Real Banking Crisis

So far this year, 11 U.S. banks have failed (FDIC data here), out of 8,451 FDIC-insured banks, matching the 11 bank failures in 2002. The last time more than 11 banks failed was 1994, when 15 banks failed on the tail end of the S&L crisis (see chart above). In total, almost 3,000 banks failed during the 15-year S&L crisis between 1980 and 1994.

The FDIC has currently identified 117 "problem banks" (through June 2008) with assets of $78 billion (data here), the highest level since 2002 when there were 136 "problem banks" following the 2001 recession (see chart below). This compares to the 1990-1992 period when there were more than 1,000 problem banks in each of those three years at the end of the S&L crisis, along with a recession in 1990-1991.

As a percent of total commercial bank assets (data here), the assets of troubled banks are currently at 0.71% (through second quarter), the highest level since 1995, but far below the 20-25 percent levels in the early 1990s (see chart below).

We still have more than three months to go in the year, and there will certainly be more bank failures to come in 2008. There are also two more quarters of banking data to be reported, and there will probably be more banks added to the problem bank list. But at least back to the 1930s, there has never been a 5-year period of banking stability like 2003-2007 when only 10 banks failed, and the banking industry has probably never been in a better position to absorb a shock like the current subprime problems.

Problem banks are still a relatively small share (1.38%) of the 8,451 commercial banks, 98.62% of banks are not "problem banks," the assets of the problem banks represent less than 3/4 of 1% of total commercial bank assets, and therefore 99.29% of commercial bank assets are not in "problem banks."

Bottom Line: Despite the troubles in the banking industry, we're still a long way from anything close to a real banking crisis like the S&L crisis.


At 9/12/2008 9:35 AM, Blogger Unknown said...

I'm not certain that we can trust the 'watch list' from the FDIC. IndyMac wasn't on the list until shortly before their demise.

When companies like WaMu are seemingly days away from potential failure, it is certainly significant of something.

I don't believe we will ever see the same number of failures as we have in the past due to the M&A activity that has happened in the financial industry over the last decade.

At 9/12/2008 10:17 AM, Blogger Unknown said...

I wonder if consolidation in the banking industry since the S&L days may be masking the true extent of problem.

It seems to me that a fully diversified modern bank can shift assets and bury problems on their balance sheet much easier than a small S&L.

At 9/12/2008 10:33 AM, Anonymous Anonymous said...

chris & bill,

That's not true. There are a ton of banks and lenders still out there. Still, the crisis is going to get a lot worse before it gets better.

At 9/12/2008 10:51 AM, Anonymous Anonymous said...

Chris, fully diversified banks can also weather storms better than smaller, less diversified banks.

Look at the number, size and diversity of bank failures during the Great Depression. Thanks to the U.S. branch banking restrictions that were in place at the time, the vast majority of failures were small, local banks. Very few large banks failed. Canada, who allowed branch banking, had no failures.

At 9/12/2008 10:57 AM, Blogger Kevin said...

I wonder along similar lines as bill and chris.

If banks are failing without ever being on the watch list, how good is the watch list?

machiavelli999: I get your point but want to add that it isn't just about the number of banks. It's also about the size of those banks.

Suppose a country has 100 banks, all about the same size. Lose a couple and it's no big deal -- you have a problem with about 2% of the system as a function of assets.

However, suppose the country has 100 banks, but 50% of the assets are held by the 5 largest. 2 lost banks are NOTHING if they are small banks, but a potential catastrophe if they're one of those top five.

Looking at the number of banks failing without looking also at their size means little or nothing except in cases where all the banks are uniform in size.

I don't have a problem with Dr. Perry's data, just saying that we cannot draw sound conclusions from it.

At 9/12/2008 11:53 AM, Blogger bobble said...

when you're looking through smoke and mirrors things can seem fine.

the fact is that banks are hiding trillions of dollars in questionable assets in off-balance-sheet SIV's (similar to the accounting scheme that brought Enron down).

"WILMINGTON, Del., July 30 (Reuters) - The Financial Accounting Standards Board, which sets U.S. accounting rules, voted on Wednesday to delay accounting changes that would affect trillions of dollars in off-balance sheet assets at banks and financial companies.

Reversing an earlier decision to make some parts of the rule change effective at the end of this year, FASB members voted that the rule should take effect all at once, for reporting periods after Nov. 15, 2009.

FASB voted in April to revamp two accounting standards known as FAS 140 and FIN 46R, to eliminate a concept known as the "qualifying special-purpose entity," or QSPE, that banks use to keep assets like mortgage-backed securities and special investment vehicles off their balance sheets."
link to news item

At 9/12/2008 12:35 PM, Anonymous Anonymous said...

I am not sure we will see S&L-size foreclosures, after all a lot of dross dissapeared then. I do agree, however, that this isn't the last of it and the hedge fund market has also got some big casualties to come.

At 9/12/2008 3:52 PM, Blogger Dave Narby said...

I agree we're a long way off.

That just means the pain is going to be d r a w n o u t ...

I wouldn't want to be long financials right now...

At 9/14/2008 1:33 AM, Anonymous Anonymous said...

Bobble, good post. But the fact that the transparency delay has occurred will not stop the market from discounting all that off balance sheet stuff. The market is forward looking and it is not going to wait for all the lies to be uncovered before everyone bails. Around mid 2009 people will be wondering why they EVER decided to leave their money in anything except treasury back money markets.

At 9/18/2008 6:02 PM, Anonymous Anonymous said...

The current bankruptcies are just precursors to Sept 30th, when it's planned that hundreds of banks announce their bankruptcy as well as it being the end of the fiscal year of the government when we get to see just exactly how bad the books are.

Due to SEC regulations, you won't hear any execs talking about it, but there is a planned bank closing. While they sort everything out and sell off assets and move accounts around, we may have limited access to our funds, the failed bank's credit cards won't process anymore, etc. Some banks may be closed for up to 3 months.

So you're right, the current numbers are not yet a banking crisis. But on Sept 30th, we'll see what a breakdown of our financial system looks like.


Post a Comment

<< Home