Saturday, November 28, 2009

Are We Staring At ANOTHER Banking Crisis?

A few short days ago, Sheila Bair, the head of the Federal Deposit Insurance Corportion (FDIC), released details of the agency's quarterly report.  The findings were downright alarming.

The FDIC operated "in the red" for only the second time in history, showing a quarterly loss of approximately $8 billion. The only other quarterly loss was in 1991 with a $7 billion shortfall. To be clear, this means that the amount  "paid out" to depositors, along with the associated costs of doing so, were greater than the income earned from fees paid by banks for this insurance.  The fees were raised last year and may have to be raised yet again. 

Bair reports that, as of  last quarter, it DOES still have $23.6 billion in cash, but private estimates project that ANOTHER $100 billion will be needed to be shelled out by 2013. Of course, at taxpayer expense!

This informtion isn't meant to scare you or anyone else. Fortunately, the FDIC has the ability, at its discretion, to access a substantial credit line from the Department of Treasury. Thus, as things stand, the deposit insurance of $250,000 per institution is not immeditely threatened.

The FDIC insures nearly 8,100 banks. Of these, they now consider 552, or about 7%, to be on its "problem list", up from 416 at the end of the second quarter.  The "problem" institutions are not disclosed for fear of triggering bank runs, but their assets total nearly $350 billion!

Bank industry profits were $2.8 billion in the third quarter, which represents a stark reversal. However, losses are expected to resume in the 4th quarter as large write-offs are expected.  Unfortunately, according to research by the Associated Press, 40% of the "profit" could be accounted for by a one-time mystery accounting gimmick.

The problems don't come close to ending there.  The Office of Thrift Supervision, which monitors an entirely different set of institutions, reported that its "problem list" rose from 40 to 43 in the third quarter. Thrifts differ from banks in that they are subject to a requirement that mandates 65% of their lending be done in the form of consumer loans and mortgages.  That requirement makes them heavily dependent on housing and unemployment.

Among the most disturbing aspects of the FDIC report was its disclosure of lending activity. Loan balances FELL by the largest amount in any quarter since the data began to be compiled in 1984: $210 billion or 3%. To be fair, a large part of the decline is a result of stricter regulations meant to ensure greater prudency.

Finally, the growing banking problems extend to Europe as well.   Last week, as reported by Dominique Strauss-Kahn, chief of the International Monetary Fund, or IMF as it's more commonly known, HALF of the losses suffered by European banks could still be hidden in THEIR bank balance sheets. 

I hope everyone had an enjoyable Thanksgiving.  I have a number of topics I plan to cover in the upcoming days and weeks, including regular updates on Gold and Silver. And, this coming Monday, Part 2 of my essay on the California Fiscal Crisis will be published.  I welcome your comments, pro or con and will respond to each and every one of them.

Marko's Take

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