Year to date: The FDIC has closed 146 banks.
2007 to date: 311 banks.
Latest Details
August 6, 2010 to November 12, 2010: 38 Banks
Stated Assets: $13.78 billion
Deposits: $11.97 billion
FDIC’s estimated cost of closing all 38 banks: $2.72 billion (23% of deposits)
FDIC Year to date total estimated losses: $21.6 billion.
Loss Share Agreements
Loss sharing is a feature that the Federal Deposit Insurance Corporation (FDIC) first introduced into selected purchase and assumption transactions in 1991. Under loss sharing, the FDIC absorbs a portion of the loss on a specified pool of assets which maximizes asset recoveries and minimizes FDIC losses through least-cost approaches. Loss sharing also reduces the FDIC’s immediate cash needs, is operationally simpler and more seamless to failed bank customers and moves assets quickly into the private sector. Simply put, the FDIC may suffer more losses if the underlying assets degrade further.
In the most of closures (30 closings out of 38), the FDIC entering into loss share agreements covering a high percentage of the assets taken over by the successor banks. In connection with these 30 closings, the FDIC entered into new loss-share agreements covering an additional $8.2 billion in assets.
That brings the total face value of assets covered by FDIC loss share agreements up to about $189 billion. Loss share agreements typically guarantee at least 80% of the value of assets over a period of eight to ten years.
This is “quantitative easing” being practiced by the federal government. This defers the day of reckoning when banks are forced to reconcile the inflated condition of their balance sheets.
Some Simple Math
Declared assets: $13.78 billion
Deposits of $11.97 billion
FDIC estimated closings cost: $2.72 billion
True value of Declared Assets: $9.25 billion
Overstated value of Assets: $4.53 billion (49% of Declared value)
Neither you nor I could get away with overstating our assets in order to get a mortgage (unlike 3 to 7 years ago). Any overstatement would be classified as fraud, especially doubling the value.
Specific examples:
Maritime Savings Bank of West Allis, Wisconsin: stated assets of $350.5 million and deposits of $248.1 million. The FDIC estimated its closing cost $83.6 million. Overvalued by 113%.
ShoreBank of Chicago, Illinois: stated assets of $2.16 billion and deposits of $1.54 billion. The FDIC estimated its closing cost about $370 million. Overvalued by 84%.
Pace of Bank Closings Artificially Slow
The FDIC’s closure of 38 banks over three months is by no means an insignificant number. However, in the context of the FDIC’s overhang of troubled banks, it suggests the pace of bank closings is being kept artificially low.
As of April 2010, there were about 425 banks operating under serious FDIC enforcement orders that called into question the banks’ solvency. Since then, upwards of 25 new banks have come under such orders each month.
Therefore, closing 13 banks a month has done nothing to reduce the backlog of troubled banks operating in the Country. That backlog could only have grown.
Most likely, the pace of bank closings had been held back artificially by the need to keep up appearances for the benefit of the mid-term elections. With those now behind us, I would expect the pace of bank closings to accelerate considerably.