Taking Stock of Decline in Bank Failures

Article excerpt

Byline: Joe Adler

WASHINGTON - For followers of bank failures, March was pretty uneventful, and that in itself was an event.

Just three banks closed, the lowest monthly amount since December 2008. Only two have been closed in April. The total number of failures in the first quarter was 26, versus 30 a quarter earlier and a quarterly average of about 40 since mid-2009.

But while a slowdown in failures is consistent with an improving economy, and the Federal Deposit Insurance Corp. has said that 2010, when 157 institutions were closed, was a peak year for the recent crisis, many said there are still plenty of failures ahead. They point to a glut of still-troubled institutions - 884 on the FDIC's "problem" list - and say first-quarter call data could reveal more capital problems at struggling banks.

"It is indicative of a slowing trend overall, but I do think there is still quite a bit of bank distress out there," said Matt Anderson, a managing director for the analytical firm Trepp LLC, which has projected there will be about 100 failures this year. "It is probably true that when the first-quarter reports come in that banks that haven't gotten better or have gotten worse during the quarter ... will be at the front of the line. So there probably will be an uptick in April and May as those results come out."

Still, the recent drop-off has been startling. In the first two months of the year, 23 institutions failed. Since then, only five have been seized.

"It's too soon to tell whether this is a blip or not, but this is what we'd expect to see in an improving economy, which results in loan recoveries rather than loan chargeoffs, and increased earnings and retained earnings that start bank capital going in the other direction," said Robert DeYoung, a business professor at the University of Kansas and a fellow in the FDIC's Center for Financial Research.

Mitchell Glassman, the FDIC's former director of resolutions and receiverships, cited improved employment numbers, more sustained business profitability and better conditions for mergers and acquisitions as all helping to moderate the failure load.

The FDIC cannot "let its guard down, but when you look at all of the indicators, both the economy and the number of problem banks that actually end up in failure, the trend is looking much more positive than in the 2008-to-2010 period," said Glassman, who is now a director at Deloitte Consulting LLP.

Former regulators said that as long as the economy is recovering, the situation is improving for troubled banks. They note that failures during the savings and loan crisis started to drop as economic conditions improved. (The FDIC is expected to provide updated income and loss projections for the Deposit Insurance Fund at a board meeting Tuesday.)

"Based upon the last financial crisis 20 years ago ... once the economy starts improving time is on your side," said Thomas Vartanian, a partner at Dechert LLP who was the general counsel at the former Federal Home Loan Bank Board.

"The trends at financial institutions are now reversing and becoming more positive," Vartanian said. "That's not to say there aren't serious issues, particularly where there are high concentrations of real estate lending, but one of the things you do as a regulator sometimes is you let the economy solve some of your problems."

Part of the issue is that regulators can take more time to close an institution, Vartanian said.

"When the economy is improving, every day that goes by lessens the loss potentially to the FDIC," he said. …