The U.S. Banking Crisis Has a Long Way to Go
Calculated Risk maintains an unofficial problem bank list compiled from publicly available records. The list has now reached 894.
The FDIC has an offical list of troubled banks and the number of troubled banks was last released August 31 when the total was 829. The FDIC does not make the names of troubled banks on their list public.
CNN Money has the following graph showing how the number of troubled banks on the FDIC list has grown during the financial crisis.
The relationship between the FDIC number and the Calculated Risk list can be seen in the following graph.
The clear implication is that when the next number (as of Q3 2010) of troubled banks is announced by the FDIC at the end of November it is likely to be between 850 and 900.
The number of banks that have failed under FDIC receivership in this crisis is thus far 307. See the following graphic from Calculatorplus.com:
Of course, the FDIC asset total is far less than the total dollar cost of this financial crisis, as was documented last year here and here.
Quoting from last year:
The relationship of the current banking crisis to the size of the economy is more than seven times greater than the worst year of the Great Depression (1933). This crisis is 19 times larger with respect to GDP than the next worst year, 1989, in the S&L crisis.Now we have to see how the aftershocks and the financial system structure weakened by the “big one” interact in the coming years. I did not say months; it will take years to repair the effects of an event of this seismic magnitude.
These are astounding relationships. We have been and still are in unchartered territory. The Great Depression may not be repeated, but, in some ways, we have exceeded it to the downside. The ability of the U.S.and the world economy to withstand such a shock amazes me.
The above was written in the first year of the crisis, hence the reference to the size of the crisis compared to the worst years of previous crises.
The stress on the banks is now being compounded by questions of just how much of the securitized debt they created and underwrote may be forced back on their books at par when it is found to have been misrepresented and improperly documented as to title. The current value of much of this debt is far below par. The exposure of the banks in this regard is pretty much a hooded and unquantified monster this Halloween.
In the words of Robert Frost, we still have “miles to go before we sleep”. If we add the 894 from the Calculated Risk problem bank list to the 307 already collapsed into the FDIC receivership, the total is 1,201 banks. This may be half way to the end or it may not be there yet. Chris Whalen estimated in 2009 that more than 1,800 banks would fail in the current crisis. The Congressional Oversight Panel chaired by Elizabeth Warren estimated in February 2010 that commercial real estate loans would be problematic eventually for solvency of nearly 3,000 banks.
The bank failure parade may not peak until some time in 2011. If it doesn’t peak until 2012, then the Whalen estimate will certainly be too low and the Warren panel estimate may come into play.
I think that the real issue is that property still has a long way to fall. Commercial property will reach the bottom quicker. Though residential house prices are sticky and will only fall slowly. It might take another three or more years for residential prices to reach their bottoms. The UK will have another 5 years to fall. Then it will be a stagnant market for at least a decade. First time buyers in the UK are facing very tough terms for new mortgages, I expect that the US banks will have to do the same in a stagnant market. Borrowers are still de-leveraging and it will be a while before there is any chance of normality.
I think that US banks will be struggling for at least a decade. The losses might stop increasing in three or so years but there will be a struggle to get back to the old business model. Non bubble areas will probably coast along as before. Low interest rates are harming the recovery. It does not allow the bubbles to implode and it encourages further reckless speculation which does not benefit the economy.
Longer term the real problem is that the US is following a low wage policy and that can never compete with China or other developing nations. This will mean that it is in a slow decline. Unfortunately monetary policy will not help the US in this respect and fiscal conservatives are blocking any real chance of stopping this decline.
The problem for the US and the UK is that prices overshoot to the downside. The U.S. is pretty close to fair value but the overshoot is coming and that will take us much lower, weakening bank balance sheets. So, I agree with you there, David. In the UK, prices still are very high and I’m afraid that means a lot more pain to come. I would think the UK has more pain to come than the US on this score because prices are more inflated compared to standard averages on price to rent or price to income.
I would agree that the mid west and the flyover states are not going to fall much more. They did not experience the bulk of the problems and so should be fine. As for the bubble areas I would until recently have agreed that they probably only had another 10% further to fall a few months ago, but then I compared it to much longer trend data. The last 30 years have been described as normal and much higher than the very long trend. Why should it stay at an higher level than long term trends? That is why I think that some US prices have 20 to 30% further to fall. The world has gone through a huge upheaval financially, and I cant see it staying above trend. If I am right the drop to stable rates will take it to 20% and the rest is overshoot. Though with the state of the economy it could stay at the depressed levels for a decade or more.
I laughed at the IMF statement that Australian prices were 15% over valued. That is another bubble waiting to burst. I estimate it is a massive 60% overvalued.
The UK is still more than 30% over valued and the that is before any overshoot. Though I suspect that here any overshoot will be much smaller. UK rents are still very high, though I have noticed that they not moved that much over the last ten years from my own experience. The share of income spent on rent is still too high. The problems will come out over the next few years as the austerity measures slowly cut away at the economy and even current rents will be seen as too high. This will impact the buy to let market and ultimately the banks possibly very severely as many buy to let landlords were very highly leveraged.
Add in the fact that many homebuyers are getting a huge subsidy in artificially low interest rates and the market is still not able to find a bottom. Yes the UK market is grossly overvalued and it will damage the banks still further. We also have a far higher level of personal debt that compounds the problem for the UK banks.