THE sound of banks being shuttered hasn’t been this loud since the savings-and-loan crisis in the early 1990s. Any day now the number of failures in America this year will surpass last year’s total of 140, the highest count since 1992.
Yet the worst may be over. Though the numbers are high, most banks being seized these days by the Federal Deposit Insurance Corporation (FDIC) are tiny. Measured by assets this year’s crop is set to be roughly half the size of last year’s and less than a third that of 2008 (see chart). “We’ve turned the corner in terms of the system’s vulnerability, if not in terms of raw units,” says Gerard Cassidy of RBC Capital Markets.
The FDIC’s deposit-insurance fund, which is financed through levies on lenders and is used to absorb losses incurred by failed banks’ depositors, is crawling back from the brink. During the crisis the fund slumped from a surplus of over $50 billion to a deficit of $21 billion. That is now $15 billion and shrinking.
There is more competition for bank assets from private investors these days, giving the FDIC more options to offload portfolios. Interest may grow further if, as expected, a group of private-equity firms that snapped up Florida’s BankUnited soon pockets a handsome profit floating it on the stockmarket. The FDIC is also planning to securitise and sell seized commercial-property loans. And it is suing more than 50 executives at failed banks in a bid to recover $1 billion.
All of this is good news for the survivors. The FDIC recently scrapped a rise in deposit-insurance premiums that was supposed to kick in next year, after scaling down the fund’s expected losses over the next four years by $8 billion. It expects the number of failures to start falling next year. It helps that regional banks have cut down their most toxic assets. The stock of loans to developers is down from $630 billion to $380 billion.
Banks can expect to pay more for deposit insurance in future, however. To comply with the Dodd-Frank act, the FDIC must raise the fund’s size to 1.35% of the industry’s total deposits by 2020, up from a statutory minimum of 1.15% now. It plans to go a lot further after that.