Friday, July 8, 2011

This Week in Bank Failures

Sheila Bair leaves the FDIC tonight at the conclusion of her term in office. Her tenure there will be remembered for her outspoken opposition to the too-big-to-fail system and for navigating the biggest financial squeeze in the history of the Deposit Insurance Fund.

A ratings agency downgraded Portugal without explanation this week. This, coupled with the continuing financial difficulties in Greece, makes a new banking crisis in Europe almost a certainty. According to one study, 18 of the largest banks in Europe will need new government support in the coming months.

The effective deadline for Congress to take the United States out of bankruptcy without causing lasting harm to the country’s financial reputation was probably Wednesday, and the day passed with no hint of action. A disappointing jobs report today puts more stress on the federal budget and makes it less likely that the House of Representatives will be able to come up with a budget plan it can agree on. It still, of course, has the option of raising the debt ceiling without a budget plan, as was always done in the past, but there is no sign of that happening either. The thumb-twiddling reaction to the government bankruptcy increases the chances of a government shutdown in August. If that were to happen, it would diminish the solvency of banks worldwide that hold U.S. government securities as assets.

Layoffs are coming to some of the largest banks starting this month. The banking industry as a whole has shed a few jobs since its 2008 peak, but it will probably have to shrink by 30 percent to stay competitive.

Two billion-dollar banks failed tonight. First Chicago Bank & Trust had 3 branches in Chicago and 4 more nearby. The bank was created five years ago in a merger of two community banks, but ran into trouble almost immediately with problem loans. It had been seeking some $50 million in needed capital for more than a year. Northbrook Bank & Trust Company is acquiring the deposits and assets, paying a 0.5 percent premium for the deposits. Northbrook and its parent company Wintrust have now acquired six failed banks in the last year.

Colorado state banking regulators closed Colorado Capital Bank, which also had 7 branch offices. First-Citizens Bank & Trust Company is taking over the deposits and purchasing the assets. Colorado Capital Bank’s financial position had been declining since last year, and the FDIC had designated it as critically undercapitalized two months ago.

Also in Colorado, Signature Bank failed. It had 3 branches and $65 million in deposits. Points West Community Bank is taking over the deposits and purchasing the assets.

With the three failures tonight, there have been 51 bank failures so far this year in the United States. This is a noticeably slower pace, barely half the pace of the previous two years. However, the problem bank list has not been shrinking, and there are few indications of banks recovering from their financial woes, so the pace of bank failures is likely to pick up again at some point.