Stressed out banks?

In a piece of news that was not widely reported, the Federal Deposit Insurance Company announced the number of banks that were on its “problem list” at the end of the second quarter.  In short, 829 banks of ~7,800 were on the list.  Most importantly, that 829 figure was an increase of 775 from the number that were on the list at the end of the first quarter.  So far 2010 has seen 118 banks fail.  Additionally, the FDIC also reported that the lending tap is pretty tight as well with total loan balances falling by 1.3%.

Analysis: To make the “problem list” is an indication that a bank is nearing failure because its assets have declined in value to the point where it cannot meet cash reserve requirements.  Those reserve requirements ensure that when you go to the bank to withdraw money that you actually have a good chance of receiving your cash.  So the FDIC data are not a good thing.

Most of the banks on the “problem list” are smaller banks.  This makes senses because during the mortgage crisis of two years ago large banks received almost all of the TARP bailout monies.  As with all choices there are consequences.  The consequence of TARP has been to strengthen large U.S. banks at the cost of small U.S. banks.

Importantly, the Chairwoman of the FDIC, Sheila Bair, said that she thinks the affect on the financial system of a double-dip recession would be muted and not an issue of deep concern.  Additionally, bank profits are improving with approximately 2/3 of banks reporting a year over year profit increase.

So what we have here are mixed data.  Definitively though, that the number of “problem list” banks increased so massively in the second quarter is a bad thing.  My prediction is that bank failures will tick up in the rest of 2010, but so will bank mergers.  That bank profits are improving is important.  Back in the recession I likened banks to the “heart” that pumps “blood” (i.e. money) into the economy.  An improving economic heart function is essential to leave this ugly recession behind forever.  With improving bank profits when demand for loans from businesses and consumers eventually ticks up the economy will be ready for more robust growth.

Importance grade: 8; it’s never a good thing when banks fail.  That so many are on the brink then is a very bad thing.  However, larger banks, where the bulk of deposits reside, are strengthening.  This is potentially a harbinger of future economic health.

Jason