Bank Failures May Accelerate in 2010

NEW YORK ( TheStreet) -- With three banks that were shuttered Friday, there have been 133 U.S. bank and thrift failures this year, more than five times as many as in 2008. Tougher regulations may accelerate the pace next year.

The implosion of several large residential mortgage lenders in 2008 gave way to troubled community lenders, which were hobbled by commercial-construction and real-estate loans that soured.

All bank and thrift failures for 2008 and 2009 are detailed in TheStreet.com's interactive bank-failure map:

chart

The bank-failure map is color-coded, with states having the greatest number of failures highlighted in red, and states with none in gray. Rolling over a state reveals combined 2008-2009 totals. Pinpointing the locations provides additional information.

During 2009, many failed institutions were sold to healthier banks, with the Federal Deposit Insurance Corp. agreeing to share in losses on acquired assets. Holding companies taking advantage of generous terms include New York Community Bancorp ( NYB), which took over deposits and some assets of AmTrust on Dec. 5.

Making multiple purchases were U.S. Bancorp ( USB), Zions Bancorp ( ZION), First Financial ( FFBC), Great Southern ( GSBC), IBERIABANK ( IBKC) and MB Financial ( MBFI).

Government efforts to limit failures

When federal regulators shut down IndyMac Bank in July 2008, depositors lost an estimated $540 million on uninsured balances. That was the costliest failure for depositors in the current credit cycle.

Despite the vast increase in the number of bank and thrift failures, losses to depositors with uninsured balances have totaled $60 million this year based on initial FDIC estimates, a fraction of the $609 million in 2008. The decline reflected the temporary increase in deposit-insurance limits and the requirement that healthier banks must acquire all deposits from failed institutions.

The failures of IndyMac and Washington Mutual, the largest U.S. bank or thrift failure ever, preceded several steps taken by the FDIC, the Federal Reserve and the Treasury to limit bank failures. JPMorgan Chase ( JPM) bought Washington Mutual in September 2008.

Measures included the Troubled Asset Relief Program, or TARP, which will continue to provide capital to qualifying banks, thrifts and holding companies until October 2010.

The FDIC's Temporary Liquidity Guarantee Program, or TLG, addressed wholesale liquidity problems by guaranteeing payment on senior unsecured debt newly issued by participating bank and thrift holding companies, with guarantees ending in mid-2012.

The agency also reduced the chances of so-called runs on banks by depositors, which contributed to the demise of IndyMac and Washington Mutual, by increasing the basic individual deposit insurance limit to $250,000 from $100,000, which has been extended through 2013.

More importantly, the Transaction Account Guarantee Program temporarily waived all deposit insurance limits on non-interest-bearing transaction accounts. Considering how easy it is for a small or medium-sized business to have large amounts of operating funds flowing through a checking account, this program has been important for community banks. More than 7,100 banks and thrifts are participating and paying an annual fee of 0.1% on transaction account balances over $250,000 for the privilege.

The Transaction Account Guarantee Program was originally set to end on Dec. 31, but has been extended through June 2010.

Come July 2010, depositors with newly uninsured balances at banks perceived to be weak will be more likely to move their transaction deposits, thus removing a source of cheap liquidity. That will hurt earnings and cause liquidity problems for some institutions, possibly hastening the demise of some.

A part of the bank-reform legislation being negotiated in Congress that could have a chilling effect on bank liquidity is the requirement for secured lenders, such as the Federal Home Loan Banks, to take "haircuts" of 20% when a borrowing bank fails rather than being paid in full by the FDIC. That could seriously disrupt liquidity for banks relying on wholesale funding.

Prepaying the FDIC

Headlines that said the FDIC was running out of money were misleading. While the balance of the agency's deposit insurance fund indeed fell to minus $8.2 billion in September, even after insured institutions were charged a special assessment of 5 basis points on total assets, less core capital, contingent loss reserves of $38.9 billion already set aside to cover expected losses on 2010 left the agency with total deposit insurance fund reserves of $30.7 billion.

The FDIC will further beef up its resources by requiring insured institutions to pony up three years of deposit insurance premiums in this month, or about $45 billion. To keep prepayments from affecting institutions' earnings, banks and thrifts will be allowed to book payments on a regular quarterly basis.

Based on initial loss estimates, bank failures during 2009 have cost the deposit insurance fund $32.4 billion.

--Written by Philip van Doorn in Jupiter, Fla.

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.

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