“More Quickly Than It Began, The Banking Crisis Is Over”
–TIME website, April 10, 2009
The U.S. banking crisis continues. MarketWatch’s Ronald D. Orol reported yesterday:
The number of problem banks in the U.S. grew in the fourth quarter, with total failures reaching an 18-year high in all of 2010, the Federal Deposit Insurance Corp. said Wednesday, even as the agency reported another quarter of healthy profits overall for the banking industry…
But the number of banks on the FDIC’s “problem list” grew to 884 in the fourth quarter of 2010, up from 860 in the third quarter, and 829 in the second quarter. The institutions on the FDIC’s troubled list have low capital levels, and their names are not disclosed by the agency.
In 2010, 157 insured institutions failed, which was the highest number since 1992 when 181 institutions failed.
Orol added that the FDIC’s deposit insurance fund remained in deficit at negative $7.4 billion at the end of last year.
Not only are the number of banks shrinking, but so are the levels of lending. Last night Reuters reported:
On the face of it, the industry looks in good shape. The FDIC reported that banks had combined earnings of $21.7 billion, marking their fourth profitable quarter in a row.
But statistics showed that lending contracted for the 10th straight quarter to $7.38 trillion, down 0.2 percent or $13.6 billion.
Orol, Ronald D. “Problem banks grow in fourth quarter, FDIC says.” MarketWatch. 23 Feb. 2011. (http://www.marketwatch.com/story/problem-banks-grow-in-fourth-quarter-fdic-says-2011-02-23). 24 Feb. 2011.
“UPDATE 3-U.S. banks told they need to start lending again.” Reuters. 23 Feb. 2011. (http://www.reuters.com/article/2011/02/23/financial-regulation-fdic-idUSN2317925320110223). 24 Feb. 2011.
During the early days of the financial crisis, the Capital Purchase Program, or CPP, was established under the Troubled Asset Relief Program (TARP) to provide U.S. banks access to bailout funds. From the “Factsheet on Capital Purchase Program” at FinancialStability.gov (a U.S. Treasury website):
The Capital Purchase Program (CPP) was a voluntary program in which the U.S. Government, through the Department of Treasury, invested in preferred equity securities issued by qualified financial institutions. The CPP is now closed. Participation was reserved for healthy, viable financial institutions that were recommended by their applicable federal banking regulator… A necessary precursor to lending and economic recovery is a stable, healthy financial system. Healthy banks, not weak banks, lend to their communities and the CPP was a program for healthy banks.
I love how the word “voluntary” is emphasized in light of all that talk about the banks being forced into accepting bailout funds. Anyway, while Americans were told that their hard-earned taxes would be assisting healthy banks, the Wall Street Journal has revealed this might not have been the case. On December 26, Michael Rapoport wrote on their website:
Nearly 100 U.S. banks that got bailout funds from the federal government show signs they are in jeopardy of failing.
The total, based on an analysis of third-quarter financial results by The Wall Street Journal, is up from 86 in the second quarter, reflecting eroding capital levels, a pileup of bad loans and warnings from regulators. The 98 banks in shaky condition got more than $4.2 billion in infusions from the Treasury Department under the Troubled Asset Relief Program.
When TARP was created in the heat of the financial crisis, government officials said it would help only healthy banks. The depth of today’s problems for some of the institutions, however, suggests that a number of them were in parlous shape from the beginning.
Seven TARP recipients have already failed, resulting in more than $2.7 billion in lost TARP funds. Most of the troubled TARP recipients are small, plagued by wayward lending programs from which they might not recover. The median size of the 98 banks was $439 million in assets as of Sept. 30. The median TARP infusion for each was $10 million, federal filings show.
“We certainly understand and recognize that some of the smaller institutions are experiencing stress,” said David Miller, chief investment officer at the Treasury Department’s Office of Financial Stability, which runs TARP. He noted that Congress mandated that banks of all sizes be eligible for TARP, adding that the government’s TARP investment as a whole is performing well.
This year has seen the highest number of bank failures since 1992 according to figures released by the Federal Deposit Insurance Corp. (FDIC). To date, 157 banks have failed over the past 12 months, up from 140 in 2009. Furthermore, 860 institutions were on the FDIC’s “problem” banks list as of September 30- the highest number since 1993.
“Factsheet on Capital Purchase Program.” FinancialStability.gov (U.S. Treasury). 3 Oct. 2010. (http://www.financialstability.gov/roadtostability/CPPfactsheet.htm). 29 Dec. 2010.
Rapoport, Michael. “Bailed-Out Banks Slip Toward Failure.” Wall Street Journal. 26 Dec. 2010. (http://online.wsj.com/article/SB10001424052970203568004576044014219791114.html?mod=googlenews_wsj). 29 Dec. 2010.
The banking crisis is alive and well in the United States. MarketWatch’s Robert Schroeder wrote on November 23:
The number of problem banks in the U.S. grew in the third quarter to the highest level in over 17 years, the Federal Deposit Insurance Corp. said Tuesday, even as the banking industry reported another quarter of healthy profits…
The number of troubled banks rose to 860 from 552 a year ago, the highest since the 928 institutions in March 1993. In the second quarter of 2010 there were 829 problematic banks…
The agency’s deposit insurance fund, meanwhile, remained in deficit at negative $8 billion.
So far this year, 149 banks have failed. From the UPI on November 20:
U.S. bank failures totaled 149 for 2010 by the end of the week, federal bank regulators said.
With failures of the First Banking Center in Wisconsin, the Gulf State Community Bank in Florida and the Allegiance Bank of North America in Pennsylvania, the Federal Deposit Insurance Corp. said bank failures for the year were now nine ahead of the total number of failures posted in 2009, The Wall Street Journal reported Saturday.
In comparison to the Great Depression era, during the 1920s an average of 70 banks failed annually across the country. After the October 1929 stock market crash throughout the first 10 months of 1930, 744 banks failed- 10 times as many. In one year alone- 1933- it’s estimated that 4,000 banks closed their doors. In total, 9,000 banks failed during that entire decade.
The U.S. banking crisis doesn’t appear to be going away any time soon either. Bloomberg’s Phil Mattingly wrote back in June:
U.S. bank failures through 2014 will drain $60 billion from the Federal Deposit Insurance Corp. fund that protects customer accounts in the event of a collapse, the agency said today.
“We expect bank failures to peak this year and start tapering off next year as the banking industry continues to heal and recover, but there are some uncertainties that lie ahead,” FDIC Chairman Sheila Bair said today at a meeting in Washington.
In light of all this information, how can one find out if their bank is safe?
Thankfully, a number of bank rating systems exist to help with this task. Three popular ones, Bank Star Ratings by BauerFinancial, Safe & Sound® by Bankrate.com, and Weiss Ratings on TheStreet.com, can be accessed on the Internet and are free of charge (BauerFinancial charges for more in-depth info about the institution being analyzed). Here’s a breakdown of the three free bank rating systems:
BauerFinancial, Inc. has been analyzing and reporting on the financial condition of the nation’s banking industry since 1983. According to their website, they have earned the reputation of “the nation’s bank rating service,” as hundreds of newspapers utilize their ratings for their readers. Ratings are derived from each bank and credit union being required to file a detailed financial report with federal regulators four times a year. BauerFinancial obtains this data in its raw form from the government. The quarterly data is subjected to a thorough analysis and is compared with historical data for consistency. Upon completion of the analysis, a star-rating is assigned based on a scale of zero to five stars with five stars being the strongest.
Bank Star Ratings by BauerFinancial
Bankrate.com’s Safe & Sound® service is a proprietary system designed to provide ratings information on the relative financial strength and stability of U.S. commercial banks, savings institutions, and credit unions. The system applies more than 20 tests to each institution to measure that institution’s capital adequacy, asset quality, profitability, and liquidity. Individual performance levels are determined from publicly-available regulatory filings and are compared to asset-size peer norms, industry standards, and key absolute benchmarks. Combined results form the basis of the Safe & Sound® ratings. When possible, the system also produces a report that provides a detailed explanation of the findings for each rated financial institution.
Safe & Sound® ratings provide a star rating system to evaluate the current financial status of financial institutions. The most desirable rating is five stars; the least desirable is one. Performing institutions will generally receive a rating of three or more stars with the majority of financial institutions falling into the three- to four-star range. The top retail banks, thrifts and best credit unions will have a star rating of three or higher.
Safe & Sound® by Bankrate.com
Every quarter, Weiss Ratings on TheStreet.com monitors the financial strength of 9,000 commercial banks, savings banks, and savings and loans across the nation. Ratings are derived, for the most part, from quarterly financial statements filed with federal regulators. Companies being rated are not granted the right to influence the ratings or stop their publication. Ratings are assigned by analysts based on a complex analysis of hundreds of factors that are synthesized into five indexes: capitalization, asset quality, profitability, liquidity and stability. These indexes are then used to arrive at a letter grade rating. A good rating requires consistency across all indexes. A weak score on any one index can result in a low rating, as insolvency can be caused by any one of a number of factors, such as inadequate capital, poor underwriting practices, operating losses, or the failure of an affiliated company.
Weiss Ratings on TheStreet.com
I decided to test the three bank rating tools out myself. Navigation-wise, all three are similar in that they are very simple to use. Information-wise, it’s a different story. Weiss Ratings on TheStreet.com only provides a letter grade rating for a particular bank. No other information is made available from what I could tell. BauerFinancial’s Bank Star Ratings also takes a minimalist approach, offering only a star rating for an institution when using the free search. However, as I mentioned previously, there are a variety of reports available for those desiring more information, starting at $10. Finally, there’s Safe & Sound® by Bankrate.com. Data-junkies like me will appreciate this rating system. Like BauerFinancial, Bankrate uses a star grade for each bank. However, Bankrate also provides a “Memorandum on findings” and “Financial statement” when possible as well. And the info provided is pretty substantial.
One more thing, perhaps a person is looking for a new bank and wants to find one that is “safe.” Weiss Ratings and Safe & Sound® is set up to do that as well.
All in all, when looking at a bank’s safety rating, if one wants to keep things simple (star rating or letter grade rating), Bank Star Ratings by BauerFinancial and Weiss Ratings on TheStreet.com accomplish this. If one wants to investigate further, Safe & Sound® by Bankrate.com is the best tool for the job. As for me, I’d use all three in looking at how safe my bank is. Obviously, there are no guarantees in life, and these ratings should not be relied upon exclusively in making banking decisions. However, they do offer valuable insights into a bank’s financial health.
(Editor’s note: Links to all three free bank rating systems have been added to the “Resources” page)
Schroeder, Robert. “Problem banks grow in third quarter, says FDIC.” MarketWatch. 23 Nov. 2010. (http://www.marketwatch.com/story/us-problem-banks-grow-to-860-in-third-quarter-2010-11-23). 10 Dec. 2010.
“U.S. bank failures reach 149 for the year.” UPI. 20 Nov. 2010. (http://www.upi.com/Business_News/2010/11/20/US-bank-failures-reach-149-for-the-year/UPI-89981290270591/). 10 Dec. 2010.
Mattingly, Phil. “Bank Failures Through 2014 Will Drain $60 Billion From FDIC, Agency Says.” Bloomberg. 22 June 2010. (http://www.bloomberg.com/news/2010-06-22/bank-failures-through-2014-will-drain-60-billion-from-fdic-agency-says.html). 10 Dec. 2010.
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Christopher E. Hill, Editor
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