Big Trouble in Little Banking?

The FDIC published a new report about the state of the banking industry. Aside from bailout money going directly into the pockets of executives at large banks, the industry doesn't look too healthy.

Some highlights:

-- 702 banks are now on the FDIC's "troubled" list, up 180% from the beginning of 2009
-- 140 banks failed in 2009, the highest number in 17 years. How we doing in 2010? Well, 20 banks have failed so far...
-- The 8,000+ insured banking institutions managed to generate a collective profit of $914 million in Q4 2009. While better than the $37 billion loss in Q4 2008, those profits were concentrated in the largest banks, meaning pretty much every other bank lost money.
-- Yearly profit was $12.5 billion, down from $100 billion in 2007. Banks are increasingly turning to "noninterest income" to bolster their bottom line. What is "noninterest income"? Well, more than half of it is coming from banks making trades on Wall Street instead of, I don't know, making loans.
-- Net charge-off rates for bad loans hit 2.89 percent for the year. This is the highest rate in the 26 years of collecting net charge-off data.
-- The value of loans and leases more than 90-days past due increased 6.6% to $391.3 billion. This represents 5.37 percent of all loans or leases outstanding and, again, is the highest level in the 26 years of collecting data.
-- The value bank assets (outstanding loans) decreased by nearly $732 billion last year, meaning loans are being paid off. Unfortunately, it seems that this is heavily concentrated in business loans, not personal or residential loans. Even worse, credit card debt grew another $29 billion.

Now that the Fed is starting to ratchet up interest rates and tightening credit, experts predict this will put more strain on banks since it cuts off an easy source of income for them. So that means more banks are likely to fail or turn to risky "noninterest income" to meet the earning demands of investors. Either way, it should be an interesting year.

"Interesting" meaning financially destructive?

I saw on the news the other day that a bunch of banks got shut across Kentucky, California and Idaho (I think) all on the same day. It was kept pretty schtum, which is a bit underhanded. I think anyone that reckons the Americans are emerging shiny and new and learned from the economic crisis now is a bit 'special'. I reckon it'll be a double-dip recession. From these statistics (particularly the credit-card debt increase), it seems everyone's sticking their fingers in their ears and singing really, really loudly when it comes to the economic reality of the USA.

The FDIC is also broke - the insurance fund is empty, because they haven't done their jobs and closed down banks before their losses exceeded their reserves ... which is what happens when you allow people to mark-to-fantasy assets instead of mark-to-market. It should be obvious at this point that we have done nothing to address the root problem, but rather have simply papered over the issues. All of the major banks still hold most of the assets that they held in 2008 - in fact, their quality is still declining. But they are still treated as if they are full, performing assets. Eventually, though, this stuff catches up with you even when you mark-to-fantasy because your cash flow stops - that's what is happening to these banks that are failing. Expect many more over the course of the year - part of the reason there haven't been more is that the FDIC is stretched too thin. They've been setting up shop in Puerto Rico, for example, to get ready to shut down three banks there that should've gone of out business years ago.