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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)

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