Bank Failures Set To Accelerate
Just in the first 60 days of the year 2009, Federal regulators have taken control of 14 banks, and the signs are this number will likely rise significantly by the year end. Compare this to last year when 25 banks failed the most notables being Washington Mutual and the large mortgage lender Indymac.
Approximately 1,900 banks and related financial establishments went out of business during the late 1980s (1987 through 1991), with a massive 534 bank failures in just 1989 alone.
Unfortunately, the bank failure pattern that is currently developing is such that at the end of each week, the question is not whether any banks failed, but which ones? Experts believe the number of bank failures for 2009, based on the numbers year-to-date, will likely exceed 100 with a total asset base of more than $50 Billion. That’s billion with a B! Some experts even believe this to be a conservative estimate. Indeed, looking further into the future, it is not unreasonable for bank failures to reach more than 1000 by the year 2014.
Problems This Time Are Different
The problems that are generating the bank failures in this current recession are a little different than from the last recession. In the last recession it was the climbing interest rates that caused the majority of the problems. Interest rates are not a factor this time. It is just that many dozens of banks are invested in portfolios that have deteriorated beyond belief.
FDIC Will Do The Best It Can… But Don’t Count On It
When banks fail, not all is necessarily lost from a consumer stand-point. FDIC (Federal Deposit Insurance Corporation) will usually prevent personal customer losses because they guarantee deposits of $250,000 per account. More often than not the failing bank’s customers will not see any noticeable changes in the bank’s operations.
However, FDIC is projecting losses of $40 Billion through the year 2013. Almost 25% of this figure has already been consumed by the crash of Indymac.
It is probable that the Federal Government will not allow the largest of the large banks to fail. This would include the likes of Bank of America and CitiGroup. Other banks, though, are pretty much on their own, even some of the bigger ones.
FDIC is also increasingly looking at other banks taking over failing banks to take at least some responsibility of the failing bank’s depreciating portfolio and financials.
FDIC is compiling a list of banks that are most at risk of failing. Although the accuracy and viability of this list will be challenged by many, one thing is certain… we should be prepared for many more bank failures through the rest of this year and going forward into 2010.
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