Predicting This Year's Bank Failures

Aug.31.10 | About: KBW, Inc. (KBW)

By Dan Hamilton

The FDIC’s quarterly banking profile, providing data for quarter 2, was released today.

The number of 2010 United States bank failures will likely exceed the 2009 failures, the FDIC reported. This was as I reported in this space back in May. Thus far this year there have been 118 bank closings, which compares to about 80 by the same time of year in 2009. The number of banks on the problem list is still rising. It is now at 829 banks.

Net charge-offs have improved a bit (from $53.5 billion in quarter 1 to $49 billion in quarter 2), but they remain very high.

Some banking indicators have improved, namely earnings and credit quality. Twenty percent of insured institutions lost money in quarter 2 compared with 29 percent in quarter 1. I suspect that earnings are supported in part by the Fed’s policy of paying interest on excess reserves, which I point out, for the umpteenth time, is a contractionary monetary policy. Credit quality has also improved. The massive pace of net charge-offs, $50 billion per quarter for the past 5 quarters, has thankfully led to this improvement in credit quality.

We have revised our prediction for the total number of bank failures this year. Our most recent prediction from June 22 was 160. Our current projection is 158, which is based on 40 more failures yet to occur this year or about ten more failures on average each month for the remainder of the year. The monthly profile will likely be declining with September and October greater than November and December. This compares with 140 failures in 2009.