Friday, August 14, 2009

Bank Failure Friday Articles

by Bill McBride on 8/14/2009 10:55:00 AM

From Bloomberg: Toxic Loans Topping 5% May Push 150 Banks to Point of No Return (ht Brian, Mike, James)

More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.

The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming ...

Missed payments by consumers, builders and small businesses pushed 72 lenders into failure this year, the most since 1992. More collapses may lie ahead as the recession causes increased defaults and swells the confidential U.S. list of “problem banks,” which stood at 305 in the first quarter. ...

Chicago- based Corus Bankshares Inc., Austin-based Guaranty Financial Group Inc. and Colonial BancGroup Inc. in Montgomery, Alabama, each with ratios of at least 6.5 percent, said in the past month that they expect to be shut.

Excluding the stress-test list, banks with nonperformers above 5 percent had combined deposits of $193 billion, according to Bloomberg data. That’s almost 15 times the size of the FDIC’s deposit insurance fund at the end of the first quarter.
From Floyd Norris at the NY Times: Teetering on Failure, but Meeting Standards
It appears that Colonial BancGroup, which Mr. Lowder started with the acquisition of a small bank in Alabama in 1981, may soon become the largest bank failure of 2009, with more than $25 billion in assets.
...
If Colonial does fail, it will call into question both the effectiveness of the regulation of rapidly growing banks, and of the capital standards regulators use. Even now, Colonial claims to be adequately capitalized. As recently as March, it met the criteria for being “well capitalized,” the highest designation.

How could a bank be well capitalized and facing government orders to find more capital? One reason is that the government’s rules allow banks to ignore the declines in market value of many loans and other assets in computing how much capital they have. Had Colonial been forced to count the losses it had already acknowledged, its capital situation would have appeared dire earlier than it did.
...
By the end of 2006, 41 percent of Colonial’s $15 billion in lending was for construction, with most of that in Florida. An additional 28 percent was in commercial real estate, with Florida again dominating the book of loans.
As I noted last night, court records indicate the FDIC issued a new Cease & Desist order to Colonial on August 11th. Among other restrictions, this new order required pre-approval of all "material transactions" - very rare.