America’s small bank problem looks manageable

February 23, 2010

Killing zombies isn’t just a job for horror-movie heroines. It’s also Sheila Bair’s primary task. And the Federal Deposit Insurance Corp chief’s challenge has increased as the number of scary banks on the regulator’s watch list has spiked. Thankfully, there’s no financial excuse to keep FDIC from quickly exterminating the industry’s living dead.
On Tuesday, the agency reported 702 institutions on its “problem” list at the end of the fourth quarter — up from 552 in the third quarter. Moreover, total assets for banks on the list increased to $403 billion, or 3 percent of GDP. While these are terrifying figures, the FDIC also managed to collect $46 billion of fresh cash from banks, bringing its total cash and liquid securities to $66 billion.
That may not sound like enough. After all, the average estimated loss rate for failures since 2007 — excluding the collapse and simultaneous sale of Washington Mutual to JPMorgan – is 23 percent of assets. On that basis, FDIC’s kitty would appear to be some $27 billion shy of being able to handle its current list of troubled institutions.
But not all of the banks FDIC diagnoses as sick will need to be seized. As is often the case, many banks work their way through their difficulties, raise fresh private capital or are taken over by healthier rivals. And the FDIC can levy another special assessment on banks before asking the U.S. taxpayer for help anyway. Add it all up and the FDIC has no financial excuse not to get busy cleaning up the mess.
Yet the pace of bank seizures — up by half in the past year — hasn’t kept pace with the growth of the problem bank list, which has nearly tripled. The worry is that has left too many zombies hobbling along, sucking up deposits and hoarding capital that might otherwise be lent by healthy institutions, thereby helping the economy to rebound.
True, the “Snowmaggedon” storms that closed Washington earlier this month complicated travel plans for FDIC staff. But the key lesson from the savings and loan debacle was that delays in closing insolvent banks increases the resolution costs for FDIC and, ultimately, taxpayers. With spring just around the corner, Bair needs to set her sights on a big zombie hunting trip.

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