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'Too Big to Fail' Money Center Banks Still Face Stress

NEW YORK (TheStreet) -- The Federal Deposit Insurance Corporation's Quarterly Banking Profile, or QBP, has a wealth of data and information covering the banking system and the types of assets where stress still exists.

On Tuesday, I wrote The Banking System's Slow, Stressful Recovery.

Now I'll discuss how the "too big to fail" money center banks still have risk exposures as the "Great Credit Crunch" continues.

Our nation's biggest financial institutions also face financial issues that are not presented in the FDIC QBP such as new Basel III capital requirements, regulatory stress tests, the living wills and the Volcker Rule to limit proprietary trading. In Tuesday's article I discussed the funding of the Deposit Insurance Fund. The banks covered here will be required to pony up larger DIF assessments than the smaller community banks.

The FDIC report shows the status of four categories of risks for the banking system since the end of 2007, when the "Great Credit Crunch" began. I will focus on the four "too big to fail" banks, which are bigger today then when the crunch began.



Residential Mortgages (homes housing one to four families) have declined by $370 billion, or 16.5%, since 2007. These mortgages are on the books of the banks, not in the securitization pipeline.

The potential problem here is that mortgage delinquencies remain elevated and additional foreclosures will occur. The slow progress in this category was a sequential rise of 0.9% in the second quarter to $1.88 trillion versus the first quarter.

Home Equity Loans declined $27.2 billion since the end of 2007. Problems with these second lien loans occur when the primary mortgage is being serviced by a different bank.

In this case, if a homeowner was current on his primary mortgage but is missing payments on the home equity loan it becomes difficult to foreclose, as such would not be in the best interest to the primary mortgage holder.

Other Real Estate Owned, or OREO, is up $29.6 billion since the end of 2007, and totals $41.8 billion -- up 244.2% since "The Great Credit Crunch" began at the end of 2007.

This asset class grows as foreclosed properties become hard assets on the books of our banks. It is an asset with costs attached such as; property taxes, HOA fees, and maintenance. The net total of OREO peaked at $53.2 billion in the third quarter of 2010, as properties are sold to new investors.

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