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Bank Failures

Posted by Wendell Brock on Mon, May 26, 2008

MarketWatch posted an article titled "Bank failures to surge in coming years", which addresses a few issues surrounding the anticipated surge of bank failures, so far this year there have been three bank failures.  Overall, the article is very good and interesting - I just wanted to post a couple comments. 

As mentioned in the FDIC's annual plan they have been planning for such events (see BankNotes), in terms of additional work force and new systems.  They have carefully tested these systems to further prepare for financial disasters.  In the past few years they have been strongly encouraging banks to reduce their ratio of commercial real estate loans to below 300% of capital or lower depending on the bank's particular circumstances.  The regulators have done their job - in fact if anything they have been aggressively though. 

One challenge is that the banks are competitive and they are looking for deposits as well as loans.  The markets are demanding a rate of return.  The competition has caused banks to narrow margins, which are being squeezed tighter and tighter, and their overhead continues to climb.  At times, they may look at loans that perhaps they would normally not write. 

So now it appears that there will be more bank failures, what do we do?  It seems that patience is needed at all levels.  The regulators, can be a little slower to close banks, which they really do not want to close banks in the first place.  The banks can slow down on their aggressive lending practices and work to solve the issues with the problem loans, which they have done.  Now we need to wait to see - not 30 or 60 days but a year or more.  Banks will need time to work out these loans.  So, they can see their Texas Ratio start heading back down to lower levels.

Our economy has gone through these cycles before and they will go through them again - we all just need to be patient and let the dust settle.  When that happens we will see a little clearer and be able to better judge what to do next.  It's the old saying that ‘assets are soft and debts are hard', the assets and debts of the bank are no different.  How do you match up assets that are soft against hard debts - you can't - you have to wait until the assets rebound.  That takes patience!  But they will rebound - I don't think any piece of real estate in this country has ever been deem - ‘completely worthless' if it has it has not been there for long - someone has made some value out of it in the future.  Moreover, they will do it again with any property a bank has on its books.

Topics: Bank Failure, Bank Regulators

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