Bank Failures Decline, But Economists Still Cautious

Sep 26, 2011 1:08pm

The Federal Deposit Insurance Corporation (FDIC) announced its 73rd bank closure this year, pacing well behind the gargantuan number of 157 total bank closures in 2010.

But while domestic banks are still reeling from the 2008 financial crisis, concerns grow in the U.S. about banks’ exposure to the Greek and European debt crisis.

On Friday, the FDIC announced the two most recent bank closures:  Citizens Bank of Northern California in Nevada City, Calif., and Bank of the Commonwealth, Norfolk, Va.

Greg Hernandez, FDIC spokesman, said the 73 closures so far pale in comparison to the 157 closures in 2010. He said at about this time last year, there were 127 bank failures.

“We certainly have slowed down,” he said. “The FDIC has looked at 2010 as the turning point of bank failures.”

In 2009, there were 140 bank closures and in 2008 there were 25. There were only three bank closures in 2007, according to the FDIC.

Gary Shilling, president of economic consulting firm A. Gary Shilling and Co., said the banks that are still closing are a result of the “very questionable loans” before the financial crisis. Many of those loans were connected to sub-prime residential mortgages, and when those defaulted, banks had to take a write-down and didn’t have enough capital to proceed with business as usual.

Shilling cautioned that while he does not expect the same depth of bank failures as last year, he said there could be further declines because of other economic problems such as bank exposure to the European debt crisis. In July, Shilling was one of the first economists to publicly forecast a recession next year.

“Banks are intertwined globally,” he said. “Although the smaller banks, which are usually the most vulnerable, probably don’t have a lot of international operations.”

Of concern is also the decline of real estate prices and its effect on commercial real estate loans from small and medium banks, Shilling said.

Hernandez said when FDIC-insured banks fail, the agency, as receiver, tries to smooth the process for depositors. In the majority of cases, a failed bank is acquired by another  bank, so services to the community are the same, but under a new name.

“A bank failure is a seamless process and that’s the way it’s supposed to be for the general public,” he said.

In 2009 and 2010, the FDIC opened three temporary satellite offices in Irvine, Calif., Jacksonville, Fl., and near Chicago to assist with the overwhelming number of bank closures.

But two of the three satellite offices will be closing ahead of schedule. The FDIC announced on Sept. 14 that it will be closing its temporary Midwest satellite office because the bank failures in that region are decreasing.

Earlier this year, the FDIC announced that its West Coast office would close on Jan. 13 next year because of a “declining workload.” The FDIC said it expects its temporary Jacksonville office to remain open until at least the fourth quarter of 2013 because of the “substantial work remaining in that office from the large number of bank failures that have occurred in the Southeastern U.S.”

 

 

 

 

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