The Risk Didn’t Pay – Bank Closures on the Rise
The current real estate crisis in our nation began when lax lending standards triggered a feeding frenzy of easy credit that allowed homebuyers to get in way over their heads with mortgages they could not afford. This spending spree also initiated a spike in real estate prices as demand was high. Now the dust has settled, house prices have corrected back to more reasonable values, and homeowners have been stuck with mortgages worth far more than their property. Record numbers of people have already lost their homes and hundreds of thousands more are currently at risk of succumbing to foreclosure.
While people need to be responsible for their own actions, many feel that the banks are to blame for being greedy and allowing this mess to occur. Either way you look at it, the banks took a risk handing out sub-prime mortgages, and now it seems that risk isn’t going to pay off.
Bank closures for 2010 reached the 103 mark as of July 23rd, and are on pace to exceed the 140 closures that occurred in 2009. It is expected the number of failed banks will peak this year; however, the total is likely to be the highest since the height of the Savings and Loan Crisis in 1992. Comparing these numbers to the 25 closures in 2008 (the year the financial crisis took hold), and the measly 3 shut downs in 2007; these recent figures are significant. The FDIC, the bank’s insurer who also initiates the closures after conducting audits, say they have another 775 banks on their confidential “problem” list; a jump of 73 in the last 3 months. The FDIC, which provides deposit insurance up to $250,000 for customers, expects to dole out upwards of $60 billion between now and 2014; this is on top of the $30 million laid out in 2009.
Soured loans from both the residential and commercial markets have been the main contributor to the demise of these banks; however, the global financial crisis has also been taking its toll on the beleaguered institutions as the stock market sees sharp declines and investor confidence continues to fall. While some of the bank’s woes have been alleviated by federal stimulus packages, the continued economic situation is proving to be a road block for the generation of new capital.
It seems all banks are vulnerable, regardless of size. The recent round of 7 closures saw Crescent Bank and Trust in Georgia close 11 branches, totaling $1.01 billion in assets and $965.7 million in total deposits, and the much smaller Thunder Bank in Kansas with only 2 branches, $32.6 million in assets and $28.5 million in deposits, experiencing the same fate.
So while fingers are being pointed at the financial institutions for facilitating this mess, they too are suffering from the ongoing effects of this recession.