About That Banking Crisis
by Charles Lemos, Sat Oct 10, 2009 at 05:43:34 PM EDT
Ten days ago, I wrote about how a proposed rule change at the Federal Deposit Insurance Corporation (FDIC) underscores the severity of our banking crisis. Then I commented on how the Board of Directors of the FDIC had adopted a Notice of Proposed Rulemaking (NPR) that required insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. In doing so, the FDIC collected about $45 billion to shore up its liquidity as it closes failing banks transferring their assets to larger ones. And on a number of occasions, I've touched upon the crisis in the nation's commercial real estate sector.
These two stories are not unrelated. About $870 billion, or roughly half of the industry's $1.8 trillion of commercial real estate loans, sit on the balance sheets of the smaller and medium-sized banks that are now under increasing duress as defaults mount. In September 2008, the commercial real estate default rate stood at 1.38 percent; it is now projected to hit 3.9 percent by year's end and 4.7 percent in 2010. And what this portends is an increasing consolidation of the nation's banking sector that will benefit the already rich and powerful.
In the past 15 years the US commercial banking sector has already undergone an unprecedented concentration. In 1995, the top five banks had a combined 11 percent deposit share; today they have nearly 40 percent. The top three - Citigroup, Bank of America, and JPMorgan Chase - account for 30 percent of the nation's deposits. These three banks also account for over 40 percent of bank loans to corporations. Half of all Americans do business with Bank of America. Expand the list to the nation's top 15 banks and they control a full 70 percent of the nation's deposits. In size, these banks have become too big to fail. They are allowed, if not encouraged, to take on risk because ultimately Uncle Sam will bail them out if their practices run awry. But such conditions do not exist for Main Street banks.
Small banks are failing at a prodigious rate. Ninety-eight US banks have failed so far in 2009, up from 25 during 2008 and only three in for all of 2007. Twenty-four insured institutions with combined assets of $26.4 billion failed during the second quarter of 2009 alone. But this is just the tip of the iceberg, the banking sector's assets shrunk by about $300 billion per quarter in the first half of 2009. And since defaults are still increasing, the sector faces an even more turbulent 2010. Christopher Whalen of Institutional Risk Analytics, for example, forecasts the FDIC will ultimately need $300 billion to $400 billion to recoup losses to its bank insurance fund. It's all quite a mess and it requires attention because the sector is under-capitalized and reluctant if not unable to lend causing a drag on the overall economy.