New Banking Issues on the Horizon

Two more banks failed on Bank Failure Friday

There are now 94 failed banks in 2009 on our way to 500 to 800 bank failures into 2011 / 2012.

Irwin Union Bank & Trust (IFC) was on the ValuEngine List of Problem Banks with C&D and CRE risk versus Tier One capital ratios of 155% and 625% versus the regulatory guidelines of 100% and 300%.

There are more than 3,000 banks with this dilemma, and 763 are publicly traded and make up the ValuEngine List of Problem Banks.

The FDIC Needs to Increase the Depleted Deposit Insurance Fund

As I predicted, the FDIC is considering tapping its $500 billion temporary line of credit with the US Treasury. Their permanent line has been raised to $100 billion from $30 billion, and funds will be needed as 500 to 800 community and regional are set to fall like dominoes.

It seems to me that if the FDIC taps the Treasury without charging the banking industry, which it has the authority to do two more times this year, it will be a sign that the 416 banks on their private Problem List is growing, and with 37.5% of all banks overexposed to Commercial Real Estate Loans its tough for the FDIC to depend upon the remainder of the banks.

Following the two bank failures last Friday, I would the DIF in arrears by an estimated $3.7 billion. Remember that the FDIC told me that they do not keep track of the DIF on a daily basis.

To Fix the Banking System, I Say, Bring Back Glass-Steagall

The Glass-Steagall Act was passed in 1933 in reaction to the collapse of a large portion of the American commercial banking system in early 1933. Isn’t it interesting that since the act was reversed in November 1999, all we have had since are bubble after bubble, which nearly destroyed the big banks since The Great Credit Crunch began at the end of 2007.

Our banking regulators allowed the big banks to create $205 trillion in notional amount of derivative contracts by the end of Q2 2009. These ridiculous contracts did not take off until after 1999. At the end of December 2001 there were just $45 trillion of them. Back in 1994 we could not spell “derivative”.

FYI – At the end of 1994 there were 12,655 FDIC insured institutions, by Q4 2001 we were down to 9,613 and at the end of Q2 2009 we are at 8,195. I am in favor of an orderly bank consolidation.

We Need Mark-To-Market Accounting

FASB met last in August to discuss whether or not banks should value nearly all financial instruments on their balance sheets, including loans, at a market value, and to reflect them in earnings.

Securities are either “Held to Maturity” or “Held for Trading”. The former requires additional capital, while the latter requires mark to market. The idea of having off balance sheet items just makes the big banks bigger, and that’s where there are many ticking financial time bombs.

Banks obviously oppose such a change. FASB will release a proposal in the first half of 2010. I say you have to use mark to market accounting, and we better get used to it.

Disclosure: I Hold No Positions in the Stocks I Cover.

Comments

[Big Bubbette:]

It is not just bringing back the Glass-Stegall Act, it is about splitting up the banks into the pre-Glass-Steagall repeal size (re-set to 1999). The government says these banks are now too big to split-up and instead want to provide more oversight to the Federal Reserve.

There is the small problem of what to do with the toxic anchors these banks are dragging. Which part of the bank would take the toxic assets with them? For example, at last estimate BofA was thought to have about 50 trillion in toxic assets (give or take a trillion).

How much of these toxic assets can be pushed through the PPIP program on to the backs of the taxpayer remains to be seen. The mark to market accounting is something that needs to be looked at in the valuation of these toxic derivatives. It has the potential for great mischief in the valuation of these toxic derivatives that are basically guaranteed by the taxpayer. Will it provide cover if these assets are "suddenly" discovered to be worthless?

Sep 21 07:43 PM