REUTERS SUMMIT-Key banker sees cost of U.S. bank failures rising

November 16, 2009

FDIC spokesperson Roberta Valdez shows identification to gain entry at a California National Bank branch in downtown Los Angeles October 30, 2009. The failed bank was seized by U.S. authorities and acquired by U.S. Bancorp. (File Photo) REUTERS/Sam Mircovich   (UNITED STATES BUSINESS) By Karey Wutkowski
NEW YORK, Nov 16 (Reuters) – The cost of U.S. bank failures will continue to rise sharply and will likely exceed the government’s current expectations, a leading investment banking executive said on Monday.

James Dunne, senior managing principal of Sandler O’Neill, said he believes up to 1,000 banks will fail during the current crisis and the total bill will surpass the government’s latest projection of $100 billion.

“There are a couple absolutes in the crisis,” Dunne told the Reuters Global Finance Summit in New York. “Whatever you thought it was going to cost, it has cost more.”

Dunne, who has been instrumental in advising major deals with Bank of America Corp and PNC Financial Services Group, said the cost will be painful for shareholders, but the overall economy and financial markets can withstand the failures.

“It’s not going to be painful for the system,” he said. “I think these closures will not have a major effect.”

So far this year, 123 U.S. banks have been closed, the highest annual level since 1992, during the savings and loan crisis. Last year regulators closed 25 banks; only three failed in 2007.

The Federal Deposit Insurance Corp, which maintains a fund to safeguard bank deposits, has said the pace of failures will remain elevated through 2010 and then start to drop off.

FDIC projections for the total cost of bank failures have crept up over time; the agency’s latest figure is $100 billion from 2009 through 2013.

As of the end of the second quarter, 416 U.S. banks were on the FDIC’s troubled bank list. Those banks had total assets of $299.8 billion.

The latest headache for the banking industry has been commercial real estate loan portfolios, many of which are just starting to deteriorate.

Dunne said that headache is better than the crisis in confidence last year when banks were being brought down by deposit runs.

“I think the FDIC has done a terrific job of removing the liquidity issue off the table,” he said.

But he said banks can still do more to shore up their
balance sheets, particularly through capital-raising, which Dunne said has become a significantly bigger part of Sandler O’Neill’s business.

He said regulators have played a key role in the aggressive capital-raising, and said it will continue.

“I think it will be consistent for the next 12 to 18 months,” Dunne said about banks doing capital-raising. “I think we’ll have a several-year-long cleansing process.”

(For other news from the Reuters Global Finance Summit, click on

(For summit blog: (Reporting by Karey Wutkowski; editing by John Wallace) (( +1 202 898 8374))

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