Saturday, August 23, 2008

Bank and Thrift Failures

by Bill McBride on 8/23/2008 03:42:00 PM

The FDIC announced the ninth bank failure of 2008 last night; Columbian Bank and Trust Company, of Topeka, KS. To put that into context, here is a graph of bank and thrift failures since the FDIC was created in 1934:

FDIC Bank Failures Click on graph for larger image in new window.

The huge spike in the '80s was due to the S&L crisis. The nine bank failures so far in 2008 barely show up.

It's interesting to note that even with the failure of almost 3,000 banks and thrifts during the S&L crisis, the overall economy stayed fairly healthy with only a mild-to-moderate recession starting in July 1990.

During the Roaring '20s, 500 bank failures per year was common with depositors typically losing 30% to 40% of their bank deposits in the failed institutions. The number of bank failures soared to 4000 (estimated) in 1933.

It's important to note that the housing bust hasn't hurt most small banks and institutions, because the banks didn't hold many of the residential mortgages they originated. Instead the small to mid-sized institutions focused on commercial real estate (CRE), and construction and development (C&D) loans.

And it appears that bad C&D loans took down Columbian Bank and Trust Company. From iStockAnalyst on August 2nd: Columbian Bank Aims to Boost Capital, Overcome Loan Troubles

[Jim Helvey, former CEO] said many of the bank's loans financed real-estate developers' purchases of land. He said Columbian's loans typically were paid off as developers sought and gained construction lending from other banks.

"The problem started creeping in when commercial real-estate loans fell out of favor and there was no 'Bank B' to take us out of our acquisition loan," Helvey said.

The crunch in real-estate lending has left Columbian with $92 million in problem loans, which includes some construction and residential loans.
Although Columbian is small, and the losses to the FDIC will pale in comparison to IndyMac, Columbian is probably more representative than IndyMac of the type of institutions that will fail in this cycle.