US banks will hold the economy back for years

Nearly 100 US banks have failed this year. As of this morning, the tally was standing at 98. So what?

Banks have been going bust in the States all year. It certainly doesn’t seem to be bothering the markets. After all, everyone knows the banks are in trouble. As of 30 June, the Federal Deposit Insurance Corporation (FDIC) – similar to our Financial Services Compensation Scheme (FSCS) in that it bails out depositors when banks go bust – had 416 lenders on its “problem” bank watch list. That’s a 15-year high. Sure, it’s not a nice position to be in, but at least we have a rough idea of the worst-case scenario.

Or do we? Investors shouldn’t get too complacent. Because just last week, the FDIC lost a bank that wasn’t on the list. And it wasn’t a little one either. Georgian Bank was the second biggest bank in Atlanta – a “stunning omission” by the FDIC, according to Jonathan Weil on Bloomberg.

The book value of the bank’s assets was $2bn, but the FDIC reckons its failure will cost nearly $900m. That’s around 45% of the bank’s assets. In other words, the stuff on the bank’s books wasn’t worth half of what it was on the balance sheet at. That suggests that those assets were “radioactive toxic”, according to David Galland of Casey Research.

This suggests a couple of things to worry about. For one, we can’t be sure which banks are really in the clear, and which are just papering over the cracks. That’s a big worry when, even as it stands just now, “hundreds more banks are expected to fail nationwide in the next few years largely because of souring loans for commercial real estate,” reports Marcy Gordon of the Associated Press.

Secondly, where’s the money going to come from to bail out depositors in all these banks? The FDIC’s fund is now down to roughly $10bn, from around $45bn at the start of the year – and that’s all borrowed money anyway. The fund (not unlike our own FSCS) is meant to be paid for by the banking industry.

The trouble with that of course, is that if healthy banks are going to have to pay much higher insurance premiums in the future, that will put yet another strain on their balance sheets, something which the authorities will be very reluctant to allow. So in the end, as Galland puts it: “all further bills will be forwarded straight on to US taxpayers.” Along with all the other burdens they have to bear, that suggests that US consumers won’t be in the mood to snap out of savings mode any time soon.