The number will be closer to 300 this year and more in 2011.-Lou
Bank failures to keep rising in 2010, despite GDP rebound
SAN FRANCISCO (MarketWatch) — The continuing fallout from bad loans made in good years means even more U.S. banks will fail in 2010 than 2009, despite a recovering economy.
That’s the prediction of bank analysts who see as many as 200 institutions closing this year, at a potential cost of more than $50 billion to taxpayers, as risky loans approved in 2006 and 2007 take their toll.
And that represents a projected 43% increase in closures from 2009, which saw 140 failures, the most since 1992 when the U.S. was recovering from the savings and loan crisis.
Gerard Cassidy, a banking analyst at RBC Capital Markets, reckons 175 to 200 banks will fail this year and the number may keep climbing, making 2011 or 2012 the peak year for the current cycle.
“We still see hundreds of bank failures over this cycle, and we’re not certain when the cycle will end,” he said. “If you assume that the cycle lasts five years and that bank failures began in late 2007 or early 2008, it will be 2013 before we can say it’s over.”
Cassidy was among the first bank analysts to warn about a jump in failures in the spring of 2008. Read about Cassidy’s predictions.
A rebound in economic growth won’t help institutions weighed down by troubled loans made at the height of the credit boom several years ago.
“There’s an old saying in the industry that bad loans are made in good times,” said Fred Cannon, a bank analyst at Keefe, Bruyette & Woods. “The problem loans causing bank failures today were made in 2006 and 2007, at the peak of housing boom.”
“Unless home prices double or commercial real estate values go up 50% in the next 12 months, a couple of points on GDP isn’t going to make a bad loan good,” he added.
In January, 15 banks failed, and Cannon expects the 2010 total to exceed the 140 institutions that were shut down by regulators last year.
Closures in 2009 cost the Federal Deposit Insurance Corp. an estimated $36.4 billion as the regulator covered losses on bad loans before selling institutions to other banks. The failed banks had assets of $171.9 billion, for an average loss rate of 21%, according to KBW data.
The cost of January’s 15 bank failures was higher, with average estimated loss rates of 33%, KBW noted this week.
If the average bank that fails in 2010 has $1 billion in assets and it costs the FDIC 28% of those assets to shut it down, that means failures could cost $49 billion to $56 billion this year, Cassidy estimated.
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