Banks at Risk of Failure

August 27, 2008

It would be unwise to expect bank failures to remain at today’s low levels when investors are unsure about the viability of Fanny Mae and Freddie Mac in their present shape, despite the all but unlimited support of the US Government and Treasury that is behind them. There have not been that many failures so far, and Federal regulators have about 117 on their watchlist- rising from 47 to 90 to 117 during the past three quarters. Historically about 13 percent of those on their watchlist have failed on average, but there’s every reason to believe that this time the failures will be in excess of that. We’re going through the worst financial crisis of the past half century, and incidentally, the finances of both public and private sectors are arguably as weak as they have ever been.

So which are the banks at greatest risk of failure in the US?

Those regions where lending standards were laxest and irrational mortgage activity was greatest are at the greatest risk of suffering the worst levels of bank failure.Foremost among them is California, which already has had a number of failures recently. Indeed, if we look at a list of those banks that have recently failed:

1. IndyMac Bank, Pasadena, CA July 11, 2008

2. First National Bank of Nevada, Reno, NV July 25, 2008

3. First Heritage Bank, NA, Newport Beach, CA July 25, 2008

4. First Priority Bank, Bradenton, FL, August 1, 2008

5. The Columbian Bank and Trust, Topeka, KS August 22, 2008

Four of the five are seen to be in California, Florida and Nevada, which are also those that have suffered the worst of the mortgage crisis.

It’s not possible to know beforehand which banks are likely to fail, as this is often as much a function of trust and confidence, as much as of the fundamental strength of the bank’s balance sheet. There are, however, ratings systems available online that give an assessment of the strength of many banks in the US. It’s possible to check a list of 1-star rating banks for free at

http://www.bankrate.com/brm/safesound/select.asp?insttype=0

This service by bankrate.com is also one of the directions to which the FDIC redirects questions, without endorsing the content of their assessments for obvious reasons.

The recent failure of IndyMac has brought to light a troubling level of complacency about the FDIC itself : IndyMac was not even on FDIC’s watchlist.

Meanwhile, even though there is no likelihood of a housing market turnaround as long as unemployment is increasing, and credit contracting, banks have been continuing to build on their commercial real estate loan portfolios, in large part fulfilling commitments that have been made when times were a bit less turbulent. Region Bank(RF), M&I Marshall & Ilsley Bank(MI), Branch Banking & Trust Co. (BBT) all have very high loan to risk capital ratios.

It’s inevitable to ask the question then: Where will one have safety for his assets?

This is a severe financial crisis, and it’s likely to last for at least a year more.  It’s wise to distribute one’s savings in as many relatively high rated banks as possible, and, if past performance offers any guidance to the future, one should always prepare for the worst in a financial crisis of this scale.

Bank failures are unlikely to be limited to the US either. Just a few days days ago, Roskilde Bank in Denmark failed for the same reason: bad real estate loans.

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A list of possible problem banks is here

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