Thursday, May 20, 2010

The FDIC Expects Bank Failures to Peak this Year

Through May 14, 72 banks have failed in 2010, already over half of last year’s total of 140. April was a troubled month; with large failures in Illinois and Puerto Rico, 23 banks with $39 billion of assets failed – up 171% from March. By this point in the past two years, there were just 36 and 4 failures, respectively. The assets of failed bank have totaled $66 billion so far this year, compared to $34 billion at this point in 2009 and $2 billion in 2008.

The 2009-2010 spike in failures paralleled the rise in troubled loans in the banking industry. The noncurrent loan rate rose from 1.42% in 2007 to 5.37% at the end of 2009. In past periods of bank problems, nonperforming loans have peaked in the third year of the cycle. There are indications that the current cycle may follow that same pattern and crest sometime this year. The increase in noncurrent loans for the first quarter of 2009 was the smallest in three years.

Bank failures should follow this cycle as well. FDIC chairman Sheila Bair said in May that the current bank failure cycle is expected to peak in 2010. The peak is expected to be far lower than the 531-failure zenith in 1989. Total failures for this cycle will also be far lower than the 2,035 failures from 1986 to 1994 cycle.

The FDIC's cost of bank failures is also expected to peak in 2010, perhaps totaling slightly over the $36 billion in 2009. Failure costs have been concentrated in specific failures. In 2008, the IndyMac failure was responsible for over 60% of the $18 billion total. Seven failures in 2009 contributed half of the year’s $37 billion total. The same is true for this year, with five failures accounting for almost half of the aggregate cost so far. Last September, FDIC staff projected $100 billion in failure costs through 2013, with the bulk concentrated in 2009 and 2010; the total so far is almost $54 billion. The FDIC will update the failure cost projection this summer.

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