U.S. regulators on Friday closed down Commerce Bank of Southwest Florida. Though there are some early signs of economic recovery, bank failures go on growing with rising loan defaults. This takes the total number of bank failures to 124, compared to 25 in 2008 and 3 in 2007. The weak economy continues to weigh heavily on banks with a stream of loan defaults.
As the industry has to tolerate bad loans that were made during the credit explosion, the trouble in the banking system goes even deeper, increasing the possibility of more bank failures. However, the regulators are trying to avoid panic by seizing banks slowly. Also, the slow seizing could be a strategy as it is hard to get buyers for so many failed banks.
Commerce Bank had total assets of $79.7 million and total deposits of about $76.7 million. The failure of Commerce Bank represents another impact on the Federal Deposit Insurance Corporation’s (FDIC) fund for protecting customer accounts, as it has been appointed receiver for the bank. The latest failure is expected to cost the FDIC's insurance fund about $23.6 million.
Bank failures have cost the federal deposit insurance fund more than $28 billion so far this year. The FDIC insures deposits at 8,195 institutions with roughly $13.5 trillion in assets. When a bank fails, it reimburses customers for deposits of up to $250,000 per account. The outbreak of bank failures has significantly stretched the regulator’s deposit insurance fund.
The fund corpus now stands below $10 billion, down from $45 billion a year ago. Central Bank of Stillwater, Minnesota, will assume all of Commerce Bank’s deposits. The acquirer also entered into a loss-share agreement with the FDIC on $61 million of Commerce Bank's $79.7 million in assets. In the second quarter of 2009, the number of banks on the FDIC's list of problem institutions grew to 416 from 305 in the first quarter. This is the highest since the savings and loan crisis in 1994.
Increasing loan losses on commercial real estate are expected to cause hundreds more bank failures in the next few years. The FDIC anticipates the bank failures to cost about $100 billion over the next four years. In order to replenish the declining fund, the FDIC board recently mandated the U.S. banks to pay fees for three years in advance.
Also, the regulators are considering requesting the healthy banks to bail out the government soon as it is necessary to replenish the deposit insurance fund, which has slipped to 0.22% of insured deposits, below the mandated minimum of 1.15%. The FDIC also has access to the Treasury Department credit line of up to $500 billion.
The failure of Washington Mutual last year was the largest in U.S. banking history. It was acquired by
JP Morgan Chase (
JPM). The other major acquirers of failed institutions since 2008 include
Fifth Third Bancorp (
FITB),
U.S. Bancorp,
Zions Bancorp (
ZION),
SunTrust Banks (
STI),
PNC Financial (
PNC),
BB&T Corporation (
BBT) and
Regions Financial (
RF). The failed banks are victims of recession and rising loan losses.
As a result of the ongoing market turmoil, these institutions experienced massive capital erosion stemming from losses due to a significant exposure to collateralized mortgage obligations, commercial real estate loans and other commercial and industrial loans. All these factors were responsible for a drag on profitability and write-downs.
According to the FDIC, the bank failures have cost the federal deposit insurance fund more than $28 billion so far this year. Though current signals indicate that the economy may stabilize, we expect loan losses on commercial real estate portfolio to remain high for banks that hold large amounts of high-risk loans.
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