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How Will Bank Failures Impact Economy?

Posted by Larry Doyle on August 28, 2009 1:04 PM |

Will the failure of a small bank in a small community truly impact America?

Analysts discount the impact that the expected massive number of bank failures will have on the U.S. economy.

Additionally, analysts also discount the fact that the FDIC fund to cover depositors of failed institutions is close to zero. This fund can be replenished by the FDIC imposing an assessment on remaining banks or, if need be, tapping an emergency line of credit at the U.S. Treasury.

What will be the real impact of bank failures? In my opinion, American consumer confidence and small business owners will bear the brunt of the pain from the bank failures. Why?

>> The reality of further job losses at these banks and those they support within local economies.

>> The psychological impact of seeing small and community banks fail.

>> The lack of credit availability to consumers and small business owners in communities across America.

What are the plans to stem the tide and plug the holes created by bank failures?

1. Have larger banks take over these institutions. What are the risks in this transition? Many of these banks are already filled with underperforming and delinquent loans. The acquiring banks typically want the cheap deposit base of the failed banks and little more.

2. Private equity buyers will have the opportunity to purchase failed banks. What are the risks in this process? The private equity buyers will have to maintain higher capital ratios. Another risk is that the private equity buyers may utilize the cheap deposit base as a pool of liquidity and capital for higher return undertakings than traditional lending in the local communities.

In my opinion, the gap dividing Wall Street and Main Street is only going to grow wider in the midst of these bank failures. The party on Wall Street has little appreciation for this reality on Main Street.

John Kanas, the former chairman and CEO of North Fork Bank, and his private equity firm purchased BankUnited in Florida this past May. Kanas addresses these topics in an interview on CNBC.


Related Commentary:
   Halting Recovery Divides America in Two
   by Cari Tuna, Liz Rappaport, and Julie Jargon
   The Wall Street Journal (August 29, 2009)

  • kbdabear

    This fund can be replenished by the (A)FDIC imposing an assessment on remaining banks or, (B) if need be, tapping an emergency line of credit at the U.S. Treasury.

    (B) is the correct answer. Thank you for playing. Tim, tell them what they’ve won

  • coe

    LD – What is interesting to me is that the formal list of troubled banks – think banks now holding one of several “traffic tickets” at the disposal of the regulators (e.g. C&D/cease and desist, MOU/memorandum of understanding) – has grown to 400+ institutions..but the total assets in these banks confirm they are smaller regional and community banks. Further, if we are honest with ourselves, the “shadow list” of other banks on the cusp of serious trouble would likely double or triple that number. Clearly, these banks for the most part were not participating in the SIV/CLO/CDO/leveraged structured finance space that caused many troubles at the top of the heap. But yes, they do have mortgage whole loan and non-agency MBS exposure, and many banks also have abundant risks in the downturn of consumer and commercial real estate credit..I agree that the behavior of these banks will change and that confidence and access to credit will be adversely affected. That shoe is yet to drop and its impact on the economic recovery is yet to be fully felt.

    My developing view and one that has been hardening for some time is that these symptoms highlight a very scary premise – namely, that the leadership of these companies (especially those public, not private) – the management teams and the Board of Directors – is at best mediocre, more likely incompetent, and the crutch of deposit insurance has been royally abused at the expense of the depositors, customers, shareholders and now the American taxpayer. There really is no other conclusion to reach. This “leadership” has been riding the wave to personal wealth and rock-star status in their local communities, but are quick to ascribe blame to Wall St, the government, and the big banks. Short term profits at the expense of long-term growth; current bonuses misaligned with stakeholder interests; I suggest a provocative Jimmy Carter-esque zero-based budgeting approach: kick all of them out of their jobs and invite those deemed capable to be reinterviewed by an independent tribunal of constituents to see if they deserve a shot at their sinecured existence…unemployment would surely spike again, but maybe the replacement pool would offer all of us a better shot at redemption…I don’t know about you, LD, but I am pretty tired of the mediocrity and the lies!

  • Larry Doyle


    Very interesting perspectives. In so many words, it seems that you are assessing similar problems at the small banks that seem to plague our economy at the larger institutions as well.

    Dos anybody believe Chuck Prince, a lawyer, was the right guy to run Citi. Prior to Jamie Dimon at JPM, the leadership there including Bill Harrison was mediocre at best. BofA’s Ken Lewis is not being inducted into Banking Hall of Fame.

    As far as the investment banks, Phil Purcell at Morgan Stanley was considered to be a joke. Jimmy Cayne at Bear and Dick Fuld at Lehman possessed enormous egos hellbent on making millions/billions for themselves. Stan O’Neal at Merrill Lynch also not soon to be a hall of fame candidate.

    Which managers on Wall Street actually make the grade?

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