Failure to Communicate

So after looking at last year’s big failures, what’s next?

Informal analysis puts about 500 banks on the FDIC’s “Problem Bank List.” That number has been trending up, but it’s interesting to look at the regional differences.

It’s no surprise that the Northeast has been relatively unscathed by the financial crisis. Only 12 small New England banks are under various “agreements” with their regulators. It’s also no shocker that there are 41 banks in trouble in California. And, with 16.2% unemployment, seeing a couple of fairly large Puerto Rico banks in trouble should astonish no one.

But it is a little surprising to see that over 30 Minnesota banks are in trouble. I thought that all the home values up there were above average. And Nevada, with perpetually falling real estate values, only has 3 problem banks. Go figure.

But even with a list of problem banks, it helps to remember that bank failures and bankruptcies are lagging indicators. Now that real estate has stabilized around most of the country, these banks know pretty well how much capital they need to remain solvent. If they can raise it, either through earnings or investment, they’ll stick around. If not, the Feds will arrange a marriage, like they did last year with WaMu.

In any case, resolving problem banks is part of the recovery process. While there are always some surprises, I expect that the banking business, like the rest of the economy should be stabilizing soon.

Douglas R. Tengdin, CFA
Chief Investment Officer
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