·       Bernanke predicts bank failures -

 

http://www.washingtontimes.com/apps/pbcs.dll/article?AID=/20080229/BU...>

Federal Reserve Chairman Ben S. Bernanke yesterday said for the first
time that he expects some bank failures as a result of the spreading
financial crisis, while consumers as well as banks will bear the brunt
of what could be a protracted economic downturn.

Mr. Bernanke's testimony before the Senate Banking, Housing and Urban
Affairs Committee provided his gloomiest assessment of the economy to
date and came after the government reported that economic growth
approached zero at the end of last year. While maintaining the Fed's
official stance that recession can be avoided, Mr. Bernanke discussed
the possibility frankly and at length with senators.

President Bush yesterday said the economy is plagued by uncertainty
but is still growing after posting growth of only 0.6 percent in the
fourth quarter. "The housing issue is one that we're deeply concerned
about," he said, adding, "We'll make it through this period."

The advent of bank failures is one measure of how deep the downturn
has become. The country has not seen widespread bank failures since
the savings and loan crisis of the late 1980s, which precipitated an
expensive taxpayer-financed bailout, a major credit crunch and a deep
recession in 1990 and 1991.

Mr. Bernanke expressed confidence there would be no bank failures as
recently as last week, so his change of tune yesterday suggests that
he recently became aware of banks whose solvency is threatened by what
he characterized as a widening credit "crisis." http://groups.google.com/group/misc.survivalism/browse_thread/thread/6ba71dead81e891a/3c6f79003fa7ca8d

 

·        Small and Midsize U.S. Banks Beginning to Struggle in Credit Crisis

February 27, 2008
Eric Dash
NY Times

The credit crisis is tightening the screws on thousands of small to midsize banks across the United States, squeezing local builders and businesses that depend on those lenders for financing.

Losses are mounting so rapidly at some of these banks that a small number of them, perhaps 50 out of the 7,500 nationwide, could fail over the next 12 to 18 months, analysts said. Some of the others are likely to shut branches or seek out mergers as the weakening economy strains their finances.

Small lenders are in far less danger than they were during the 1980s and early 1990s, when roughly 1,600 federally insured institutions failed during a savings and loan crisis. And unlike many bigger banks, they shied away from complex mortgage-linked investments and subprime home loans.

But the breadth and depth of the current troubles have caught bank executives by surprise.

Federal regulators are particularly concerned about the exposure of smaller banks to the commercial real estate market, which has begun to soften in some parts of the country.

“There were people in denial six to nine months ago,” said Keith D. Maio, the president of the National Bank of Arizona in Phoenix, a small bank owned by the Zions Bancorporation based in Salt Lake City. “I don’t know if anybody is in denial anymore.”

Federal regulators concerned about the health of the industry are stepping up regular bank examinations and forcing some lenders to bolster reserves. During the last four years, just four United States banks have failed.

Stock market investors see trouble brewing. Shares of small banks have tumbled in recent months, with the Standard & Poor’s midcap regional banking index sinking 20 percent from a year ago.

“The megabanks get all the headlines,” said Jaret Seiberg, a research analyst for the Stanford Group, a private wealth management and banking firm. “But this is causing a lot of trouble for the industry and it is going to persist for the next few years.”

Small banks have been losing business to larger rivals for years. Big banks have muscled them aside in the credit card and home mortgage businesses. In response, many small and midsize banks, typically defined as those with assets ranging from less than $1 billion and $20 billion, pushed into construction and commercial lending, betting that their local knowledge of markets would give them an edge.

The strategy paid off, delivering years of strong profit growth. But now, as real estate and construction loans sour, small lenders are starting to see their balance sheets pinched.

Mark T. Fitzgibbon, the director for research at Sandler O’Neil & Partners, said losses at smaller lenders might ultimately reach $105 billion, or 15 percent of what he projected could be $700 billion of losses industrywide.

“The real estate problem has gotten worse and more pervasive, more rapidly,” Mr. Fitzgibbon said. The rapid decline in home prices in areas like Florida and Southern California is just the start. “I think you will see that spread to other parts of the country soon,” he said.

Already, residential construction lending is running into trouble. As new homes have become harder to sell, developers are falling behind on payments, and are no longer seeking new loans.

For all public banks, the late loan payment rate rose in the fourth quarter to 4.11 percent of the total, up 76 percent from the third quarter and 142 percent from the first three months of 2007, according to a Stanford Group analysis.

And the problems are likely to get worse. Some home builders are rapidly drawing down so-called interest reserves, the extra cash cushion built into a loan that is intended to protect banks by ensuring that borrowers can pay back interest. Reserves for loans for construction projects that started before the credit crisis will start running out in the next six months. Small business loans could be next.

“We are seeing an uptick in nonperforming loans to small businesses — the local retail stores, service providers, dentists, vets — but off of historically low rates.” said Steven D. Fritts, associate director for risk management policy for the Federal Deposit Insurance Corporation.

Federal banking regulators are particularly concerned about small banks’ exposure to commercial real estate.

In the last six years at community banks, the ratio of commercial real estate loans to capital, a measure regulators use to monitor loan exposure, nearly doubled to a record 285 percent, according to data from the federal Office of the Comptroller of the Currency. Nearly a third of all community banks exceed 100 percent of their capital.

Granted, most banks report that their loan portfolios are holding up and actual delinquencies remain near all-time lows. But over all, the number of borrowers falling behind is growing.

Timothy W. Long, head of supervision for midsize and community banks at the office of the comptroller, said regulators were monitoring lenders closely. He said the industry had not experienced this tough a period in years.

“I would tell you a lot of bankers out there have never had a loan charged off,” Mr. Long said. “The last time we went through this, the loan officers were in junior high.”

http://www.nytimes.com/2008/02/27/business/27bank.html?_r=2&adxnnl=1&oref=slogin&ref=business&adxnnlx=1204207332-FnGDZeZbEdRaYNmZBV3a7A

 

·       Are Your Savings and Investments Safe From Bank Failures?

Feb 28, 2008 - 01:01 PM

By: Christopher_Laird

Time to ask a few good questions about your Interest rates - I think its time to start asking some basic questions about what we all think we are doing financially. Is what we do appropriate for the times? Or, more to the point, do we view risk appropriately?

Do we live in a time where we might just see our personal banks, or financial institutions such as money market funds, MMFs, fail?

 

We might want to start asking questions about our financial reality, times, and our own assumptions about what is safe or not safe. Interest rates are one key.

Many of us have some gold. Gold is considered money par excellence, has no particular guarantees on it, other than its atomic weight. People world wide have a basic instinct that considers gold and silver money. The trait is so deeply ingrained that it has survived over thousands of years, even as nations failed, currencies failed, and people lost all their savings. But gold offers no interest. So, for our accounts that do offer interest, how should we look at that?

I think that the time is right to start asking ourselves if the financial world we live in is as safe as we might think. Let me make the point like this….

Suppose that you found out that your financial account was on the verge of being locked – like we hear some money market funds have had to do – to stop people from fleeing headlong and then the fund has to sell assets at fire sale prices. What would you do? Well, I'm sure that you would drop everything and move that money out before the account was frozen. But how can one find out before that happens, or is imminent?

It's a basic example, but, rather poignant today. Poignant now. I drove by a small bank recently and they were offering over 6% on a checking account! With a sign out front.
That is so high, that one has to ask himself how that bank can offer that interest rate, when that is about what 30 year fixed rate mortgages are at?

Or, more to the point, doesn't that show how urgent that bank is to get deposits?

We just put out an alert about this phenomenon to our readers. We suggested that, if you are being offered a rather high interest rate by your financial institution, that maybe you should consider that a warning sign. This applies to banks, broker accounts, and MMFs.

We lament the fact that a person needs to be able to ‘read tea leaves' to ascertain if his money is in a safe financial account.

I really think this issue, of whether your financial institution has to offer high interest to attract deposits, is more about how urgent their needs are. The issue becomes one where we all need to reassess risk – become risk averse, and yes, if we see some high interest rate like that – to read the tea leaves.

This is all obvious of course. But, it's the obvious things that kill. 

One needs to be able to ask questions at the right time. One cannot just blithely go forward oblivions of what is happening around him, and expect to keep his savings.

I remember reading about the Great Depression in the 1930's in the US, and there was a cartoon out. A ‘prudent squirrel' asked a man in a park why he had lost his savings. He asked the man, ‘why didn't you save for a rainy day?'

The man replied ‘I did.'

This cartoon was put out when there was a rash of bank failures in the 1930's before there was deposit insurance like the FDIC. That cartoon was one reason we chose the name PrudentSquirrel for our newsletter.

But, in any case, I just read on a gold forum about a guy who said that he had been a customer in two bank failures in the last 40 years, one in the S and L crisis in the 90s, and had to do the FDIC thingy and what a pain that was, to get his money back.

Ok

So, now, we read about the FDIC is on a hiring binge. And also there are various news comments hither and yon, where it's expected that we are going to be seeing a good number of bank failures as the credit crisis expands, and eventually drags them under. This will affect not only banks but money market funds and many financial accounts.

If you are following the bank crisis of late, and realize that the Fed and the ECB alone have pumped out an astounding $2 trillion of help to financial institutions since August 07, that maybe we all ought to be double checking the status of our financial accounts, and if – I think this is particularly important – our accounts are offering a bit higher interest than the norm, to consider this a risk profile.

If your bank, (I would say this applies to most countries right now) offers something like 6% on mere checking accounts, or CDs even, maybe you ought to consider that a risk profile.

In any case, we ought to all be asking questions about how safe we think our financial accounts are, and if they offer higher interest than the norm, to consider looking around for saver havens. You need to find out what the going interest rates are for your area.

Now, I would consider 4% a maximum interest rate for a sound institution, and that is just a general observation based on 30 year fixed rates being about 6%. I think you might find that to be the case in many countries right now, ie 4% max.

I think this level would be a high rate of return for just about any country in the world now, because money is so fluid. But the key issue is that you need to find what interest rates are in your nation, and what is competitive. If you find that your accounts have higher interest than that norm, you ought to consider that a fairly high risk profile.

By Christopher Laird
PrudentSquirrel.com

http://www.marketoracle.co.uk/Article3843.html