US regulator fears wave of bank failures

FT via Drudge ^ | 4/23/2008 | Daniel Pimlott, Krishna Guha, Joanna Chung and Ben White

[lainie]

US bank failures could rise above “historical norms” as a weakening economy puts pressure on badly underwritten loans, particularly in commercial real estate, according to a bank regulator.

In an interview with the Financial Times, John Dugan, who oversees about 1,700 national banks as comptroller of the currency, said the growing problems for lenders follow a period of almost four years in which no institution regulated by his agency had failed.

“We’re going to have some more bank failures that will come back more to historical norms and may go above that with time,” he said. “That is a natural consequence of the economy going from historically exceptionally benign credit conditions to something that is more normal to something you would get in a downturn.”

Mr Dugan’s comments come as US banks report big spikes in reserves for expected losses on consumer and small business loans, reflecting the spread of the credit crisis from Wall Street to the broader economy.

Yesterday, Atlanta-based SunTrust said profit fell by nearly half to $283.6m as provisions rose 10-fold to $560m. Ohio’s Fifth Third bank said profits fell 19 per cent to $292m as provisions rose to $544m from $84m last year.

The largest US banks, including Citigroup and Bank of America, have also seen loan losses increase as more consumers fall behind on home equity, credit card, automotive and other consumer loans. The banks have been rushing to raise capital to offset loan losses and writedowns on mortgage-related securities.

[Grunthor]

How many of these banks are the ones that thought it was a great idea to give loans to illegal aliens?

F ‘em.

[kiriath_jearim]

I don’t know whom to believe. Here’s a current FT story on this matter, apparently contradicting:

http://www.ft.com/cms/s/0/b5b77706-116b-11dd-a93b-0000779fd2ac.html?nclick_check=1

“Fears of big bank failures recede”

By Robert Cookson and Sarah O’Connor in London

Published: April 23 2008 23:05 | Last updated: April 24 2008 00:31

Investor fears over failures by big banks have receded sharply in recent weeks, pricing trends in the credit derivatives markets have revealed.

Confidence has been bolstered by the flurry of unconventional moves by central banks to stabilise the financial system, coupled with new efforts by banks themselves to shore up their balance sheets.

Some analysts hope these signs of a mood shift may herald a turning point for the financial system.

“In terms of systemic risk, we may well have passed the worst,” said Neil McLeish, credit strategist at Morgan Stanley. “We think for financials we are just about entering the repair stage of the credit cycle.”

The cost of insuring banks against default through so-called credit default swaps has dropped sharply. Earlier this year, the cost of such insurance surged to record levels. However, over the past five weeks the cost of protecting the senior debt of the 25 European banks in the iTraxx Financials index has fallen from 160 basis points to 61.5bp, according to Markit Group.

This means it now costs an average of €61,500 ($97,800) a year to insure €10m of the banks’ debt against default over five years, €99,000 less than it did in mid-March. In the US, the cost of insuring the senior debt of JPMorgan, Citigroup and Merrill Lynch has fallen 58, 59 and 51 per cent respectively over the same period.

Traders say the turning point for the CDS market was March 17, when the US Federal Reserve-led rescue of Bear Stearns signalled that key players within the financial system would not be allowed to fail. Subsequent central bank moves to stabilise the financial system – including this week’s £50bn ($100bn) “gilts-for-mortgages” swap by the Bank of England – has further bolstered sentiment.

The latest dose of good news for debt-holders came from Royal Bank of Scotland, which is rebuilding its balance sheet by raising £12bn from shareholders.

This move has badly hurt the bank’s shares, which have lost about a 10th of their value this week. However, the cost of insuring its debt has fallen 6 per cent in the same period.

Analysts forecast similar efforts by other European banks. “RBS opens the floodgates and I think a lot of banks in Europe will do recapitalisations,’’ said Jim Reid, credit strategist at Deutsche Bank, adding that such rights issues “may benefit the credit holder at the expense of the equity holder”.

[festus]

“Confidence has been bolstered by the flurry of unconventional moves”

Well I’m not sure myself if we are past the worst or not time will tell.

But anyone who is encouraged by banking having to suddenly engage in a series of unconventional moves probably doesn’t get it. If they’re being forced to do that we are still in the thick of it.

[Eric in the Ozarks]

It wouldn't be unusual for FT or any Euro paper to give two strong news stories equal play in the same edition. American editors don't do this.

[cherry]

did I read this wrong or is he saying that we've just had an unusual period of banks NOT failing and that now, its going to even out by more banks actually failing....

sounds almost like a ho-hum report...

[tubebender]

Be afraid...very afraid. I have investments in a local startup bank here?

[OeOeO]

Amen. There was an article in the WSJ a few years back where a bank in Elgin Illinois gave a 300 grand loan to a man who's income consisted of going though the trash for recyclables. His legal status was questionable. To help pay the mortgage he stuffed his house with “relatives” from the old country to pay the rent. When the neighbors complained about the congested parking and the late night oompa-pah music and the bank loan,a bank spokesman implied that the complaining neighbors were racist. I read the article here at FR, but can't find it now.

[cherry]

I had to laugh when I heard today that Bank of America was going to require "documentation" from now on.....LOL

talk about the chickens coming home to roost.....

[OeOeO]

I wish I could find that thread. It just burned me up $300,000 bought a lot of house back then in this area, You couldn't even find a decent condo for that around here now.

I'd like to know why we aren't hearing Enron type screaming about now. No one bailed them out and we had the satisfaction of seeing some carted off to jail. Methinks the gubmint is up to it's A$$ in these shenanigans.

[Travis McGee]

“Several brokerage houses tumbled; blue-sky investment companies formed during the happy bull market days went to smash, disclosing miserable tales of rascality; over a thousand banks caved in during 1930, as a result of marking down both of real estate and of securities; and in December occurred the largest bank failure in American financial history, the fall of the ill-named Bank of the United States in New York.” ~~"Only Yesterday: An Informal History of the 1920’s" by Fredrick Lewis Allen

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."~~Ludwig von Mises

[B4Ranch]

I was invited to buy into a local established local community bank last year. Turned down their offer, thankfully.

[eyedigress]

So the profits have tumbled, but how much of the base capitol has tumbled? Investors have lost “profit” but how does that equate to bank failure? I’m missing something here.

[TNdandelion]

LOL I can’t read/hear that phrase now without thinking....”God &^%$ America!” Sorry for the derail.

[RSmithOpt]

"Ya think?"....

From the realms of the deep dark secrets of Captain Obvious....brought to you personally by, greedy, deceitful SOB's.

[bjs1779]

So the profits have tumbled, but how much of the base capitol has tumbled?

This graph is of 3/1/08. Weekly stats show the April graph will end up at the -100 line or so.

.

http://research.stlouisfed.org/fred2/series/BOGNONBR

[GOPJ]

Thanks for the ping.

[SierraWasp]

Great tagline, tubular one!!!