This is the list of links to IRA's failed banks forensics pages for the banks that were closed by the FDIC in January 2010. These pages are part of our ongoing studies to understand the nature and sensitivities surrounding bank risk. We share them here so other researchers can also ponder the "patterns in the noise".
Columbia River Bank - The Dalles, OR 1-22-2010
Evergreen Bank - Seattle, WA 1-22-2010
Charter Bank - Santa Fe, NM 1-22-2010
Bank of Leeton - Leeton, MO 1-22-2010
Premier American Bank - Miami, FL 1-22-2010
Town Community Bank & Trust - Antioch, IL 1-15-2010
St. Stephen State Bank - St. Stephen, MN 1-15-2010
Barnes Banking Company - Kaysville, UT 1-15-2010
Horizon Bank - Bellingham, WA 1-8-2010
Sunday, January 24, 2010
Wednesday, January 13, 2010
First Bank Closure of 2010
On January 8, 2010 the FDIC failed Horizon Bank in Bellingham, Washington. Here is the forensic page for this bank.
Horizon Bank
Note from the data that the first indications this bank was in trouble was in early 2008. At the end of 2007, the bank's Federal Home Loan Bank (FHLB) advances exceeded the 15% maximum and crossed into territory the FDIC considers to be a Moral Hazard. One quarter later(in March 2008), the lending default rate went from 1.6 basis points to 26.1 basis points. A basis point is 1/100th of 1 percent.
The track record of the next two years shows things worsening progressively finally resulting in the first FDIC closure of 2010.
Horizon Bank
Note from the data that the first indications this bank was in trouble was in early 2008. At the end of 2007, the bank's Federal Home Loan Bank (FHLB) advances exceeded the 15% maximum and crossed into territory the FDIC considers to be a Moral Hazard. One quarter later(in March 2008), the lending default rate went from 1.6 basis points to 26.1 basis points. A basis point is 1/100th of 1 percent.
The track record of the next two years shows things worsening progressively finally resulting in the first FDIC closure of 2010.
Monday, December 21, 2009
Failed Banks. The December 18th Group
The FDIC failed seven (7) additional banks on December 18th. Two in California and one each in the states of Illinois, Alabama, Michigan, Florida and Georgia. The jump from an average of four per cycle to seven indicates that the build up of the FDIC's task force for bank closures has reached operational status and we can expect that the pruning of weaker banks from the system will proceed at a brisker pace in 2010.This is a good thing. Clipping off the low tail of a moribund system serves to eventually bring the overall industry up the quality tree. It's an example of a regulatory agency doing what it's supposed to. Yes I do hear those of you lamenting "if only we could do the same over in the large bank and investment bank segments of the system." True there's a lot more politics involved in arresting the risk shifting gamesmanship at the upper end of the spectrum to actually achieve some productive pruning. I'll take a little larger view though. The remainder of the banking system is being "trained up" by what the FDIC is doing and eventually this higher quality population of competitors will make their mark on the landscape. There may be some "mastodon stew" for these emerging hunter gatherers to feast on yet.
So here's the next installment of what I think will be a weekly forensic report by IRA. Your feedbck is important so let me know if you want to see more of these.
First Federal Bank of California, FSB Santa Monica, CA
Imperial Capital Bank La Jolla, CA
Independent Banker' Bank Springfield, IL
New South Federal Savings Bank Irondale, AL
Citizens State Bank New Baltimore, MI
Peoples First Community Bank Panama City, FL
RockBridge Commercial Bank Atlanta, GA
As you'll see in these forensic tables the IRA Bank Stress Index letter grading methodology picks up on the stresses with a fair bit of warning. More than enough to implement tactical plans to mitigate exposure and shift assets to more stable institutions.
Survey Invitation
IRA is taking a survey of how CFO's, Treasurers, bankers and bank counterparties feel about the current financial landscape. It's a short survey and we invite you to participate. If you'd like to take the survey please email Diana Waters before January 15, 2010.
Monday, December 14, 2009
Failed Banks: What was knowable when?
Bank failures happen at close of business on Fridays. A team of operatives from the FDIC shows up at the door and by the time those doors open again on Monday morning the bank has been inventoried, valued and transferred to a new owner. This story institutional devastation has happened so many times in 2009 that it become a footnote fixture in the weekly wrap up of financial news. Americans don't quite understand how it really works except to take assurance in the fact that the Federal Deposit Insurance Corporation (FDIC) somehow takes care of them even as tumult rages on.So is it possible to see this kind of trouble heading towards a bank? And if so, how far in advance of disaster do the indications begin to reveal? That's the question that comes across my desk frequently. Everyone wants to know if the IRA Bank Monitor can see it coming. The direct answer is yes. IRA's A+ through F grading system was in fact developed specifically to illustrate these Bank Stress Indices or BSI's so as to begin warning early enough while there might still be time for bank directors and officers to attempt to avoid or mitigate a crisis that could result in regulatory action. But not all banks make it. For some, the fate of failure manifests. It is from these that it's possible to study the "What went wrongs?" so that the clues in the rubble can help others avoid the same fate.
On December 11, 2009 the FDIC closed three banks. The links point to IRA's Failed Bank History Report that shows the prior twelve (12) quarters of stress history for the failed institution. They are presented here as forensic examples.
Solutions Bank
in Overland Park, Kansas
Valley Capital Bank, N.A.
in Mesa, Arizona
Republic Federal Bank, N.A.
in Miami, Florida
I highly encourage serious students of banking and bank risk to study them. Reports on live institutions are available to subscribers at http://www.irabankratings.com/ .
Tuesday, December 8, 2009
Industry and Bankers: Chasing Quality
Today we turn to looking at the banking scenarios facing CFO's and Treasurers. As 2009 ends we see the Obama Administration preparing to gear up its job restoration strategy. President Obama and his team, along with pretty much every other financial expert, correctly surmises the importance of bringing US unemployment down and restarting the Main Street economy as critical to maneuvering the economy away from the vortex created by the collapse of the leveraged finance house of cards.
I must say that I personally find the thought of a grassroots approach based on emphasizing small business recovery to be refreshing. The concept that "many hands make light work" makes good sense to me. The best of breed from the old ways will do well regardless. Encouraging and supporting smaller more maneuverable business to fill the needs voids will almost surely result in a revitalized and globally competitive United States of America. It's the kind of thing this country, encompassing all our political and cultural persuasions, is good at. It's certainly a more persuasive use of precious national wealth than continuing to prop up obsolescent "sucking sound" infrastructures. The question is of the new year will be can the Administration steer a course to the correct balance. I wish the President and his team the best in this effort.
The Flight to Quality, A Never Ending Journey
The impact on banks and businesses by what is about to unfold are many but ultimately it boils down to quality. The quality of the commercial and industrial entities that will seek and use business financing in 2010 and the quality of the banking institutions that will serve the new landscape. The banks will need to contend with two things to clear the way serving Main Street again.
First is completing the transition into a new reality that the country has moved into a post real estate boom phase. Shedding exposure is a tactical necessity. This means banks need to tend to their own health particularly with respect to the lingering cancer of losses from distressed real estate still in their bloodstreams. Projected real estate loan losses still to come are massive. The bulk of Option-ARM reset dates are in the still to come in 2010 and 2011 bucket. The reality is that these loans were never meant to survive the reset. Unless an alternative is created, the human pain and loss will be massive. The current loan modification program has an applicant failure rate of over 60% and the actuarial probability is that the remainder might just be a delaying tactic slowing the inevitable. Here's the truth. We have a lot of U.S. homeowners who can only afford to be U.S. renters. Until their relationship with finance and banking is morphed to reflect that truth the cancer will remain in the national bloodstream. Statutory loss reserves and FDIC insurance premiums will continue to suck discretionary capital away from new lending and a credit availability crisis will hamper the President's recovery agenda. Still, looking at the various piecemeal components of proposed solutions to this that have crossed my desk in the last year, I have a degree of belief there is a way to do this. It needs someone to architect it into a cohesive strategy then sell it to what is clearly still a weakened and hesitant hospital patient.
The second challenge to banks is to make the transition back to becoming a competitive marketplace for quality lending. Specifically, for the supporting the President's agenda, quality commercial and industrial lending. C&I loans and lines of credit are the fuel that grows economies. Targeted C&I for small firms may be forthcoming if the Administration follows through turning policy into substance. We should not be surprised if keen competition for the highest quality C&I customers will become all the rage next year. Indeed CFO's and Treasurers of well positioned firms should be insulted if they don't have several bankers knocking on your door courting their business accounts. There's some evidence of that happening already. Expect to see all kinds of spin about why your current bank is a pile of poop and you should become a client of bank X. It'll be all to the good because a competitive Main Street financing market is a sign of an improving economy. Don't believe bank advertising material on it's face though.
CFO's of commercial and industrial companies are well advised to exercise some "Trust No One Agent Mulder" prudence. We've seen a fair few "we're better than your old bank" pitches that turn out to have higher risk and stress ratings than a company's existing banking relationships. When asked we tell companies it's worth the peace of mind to obtain even the basic IRA report on one's bank and any bank pitching you for business. CFO's need an independent eye. Think of it as getting a "CarFax" before signing the papers. Making banks compete in the bright light of day could even sweeten the pot for a CFO particularly when being approached by equally good and competitively motivated banking alternatives. Finally, in these days of SOX compliance, it's also important to prove to the finance committee and to satisfy potential adequacy of internal controls challenges that one did use at least one independent criteria to base one's decision on.
In parallel, Treasurers need to look at their deposits placements and cash management strategies with a keen eye on bank quality. There are 8,500 or so active banks in the U.S. Not all of them are healthy. Some of them are "hazardous" and that's not a term I made up, it's a category they fall into based on business conditions exceeding regulatory criteria thresholds. And just relying on ladders and brokered deposit spreading isn't enough. Treasurers still need to pick one or more primary banking relationships where sizable balances may have to sit as part of enabling the smooth operations of the CFO and COO of the firm. The same reality that hit the Wall Street finance universe applies to industrials. Shifting risk is no substitute for reducing risk.
I must say that I personally find the thought of a grassroots approach based on emphasizing small business recovery to be refreshing. The concept that "many hands make light work" makes good sense to me. The best of breed from the old ways will do well regardless. Encouraging and supporting smaller more maneuverable business to fill the needs voids will almost surely result in a revitalized and globally competitive United States of America. It's the kind of thing this country, encompassing all our political and cultural persuasions, is good at. It's certainly a more persuasive use of precious national wealth than continuing to prop up obsolescent "sucking sound" infrastructures. The question is of the new year will be can the Administration steer a course to the correct balance. I wish the President and his team the best in this effort.
The Flight to Quality, A Never Ending Journey
The impact on banks and businesses by what is about to unfold are many but ultimately it boils down to quality. The quality of the commercial and industrial entities that will seek and use business financing in 2010 and the quality of the banking institutions that will serve the new landscape. The banks will need to contend with two things to clear the way serving Main Street again.
First is completing the transition into a new reality that the country has moved into a post real estate boom phase. Shedding exposure is a tactical necessity. This means banks need to tend to their own health particularly with respect to the lingering cancer of losses from distressed real estate still in their bloodstreams. Projected real estate loan losses still to come are massive. The bulk of Option-ARM reset dates are in the still to come in 2010 and 2011 bucket. The reality is that these loans were never meant to survive the reset. Unless an alternative is created, the human pain and loss will be massive. The current loan modification program has an applicant failure rate of over 60% and the actuarial probability is that the remainder might just be a delaying tactic slowing the inevitable. Here's the truth. We have a lot of U.S. homeowners who can only afford to be U.S. renters. Until their relationship with finance and banking is morphed to reflect that truth the cancer will remain in the national bloodstream. Statutory loss reserves and FDIC insurance premiums will continue to suck discretionary capital away from new lending and a credit availability crisis will hamper the President's recovery agenda. Still, looking at the various piecemeal components of proposed solutions to this that have crossed my desk in the last year, I have a degree of belief there is a way to do this. It needs someone to architect it into a cohesive strategy then sell it to what is clearly still a weakened and hesitant hospital patient.
The second challenge to banks is to make the transition back to becoming a competitive marketplace for quality lending. Specifically, for the supporting the President's agenda, quality commercial and industrial lending. C&I loans and lines of credit are the fuel that grows economies. Targeted C&I for small firms may be forthcoming if the Administration follows through turning policy into substance. We should not be surprised if keen competition for the highest quality C&I customers will become all the rage next year. Indeed CFO's and Treasurers of well positioned firms should be insulted if they don't have several bankers knocking on your door courting their business accounts. There's some evidence of that happening already. Expect to see all kinds of spin about why your current bank is a pile of poop and you should become a client of bank X. It'll be all to the good because a competitive Main Street financing market is a sign of an improving economy. Don't believe bank advertising material on it's face though.
CFO's of commercial and industrial companies are well advised to exercise some "Trust No One Agent Mulder" prudence. We've seen a fair few "we're better than your old bank" pitches that turn out to have higher risk and stress ratings than a company's existing banking relationships. When asked we tell companies it's worth the peace of mind to obtain even the basic IRA report on one's bank and any bank pitching you for business. CFO's need an independent eye. Think of it as getting a "CarFax" before signing the papers. Making banks compete in the bright light of day could even sweeten the pot for a CFO particularly when being approached by equally good and competitively motivated banking alternatives. Finally, in these days of SOX compliance, it's also important to prove to the finance committee and to satisfy potential adequacy of internal controls challenges that one did use at least one independent criteria to base one's decision on.
In parallel, Treasurers need to look at their deposits placements and cash management strategies with a keen eye on bank quality. There are 8,500 or so active banks in the U.S. Not all of them are healthy. Some of them are "hazardous" and that's not a term I made up, it's a category they fall into based on business conditions exceeding regulatory criteria thresholds. And just relying on ladders and brokered deposit spreading isn't enough. Treasurers still need to pick one or more primary banking relationships where sizable balances may have to sit as part of enabling the smooth operations of the CFO and COO of the firm. The same reality that hit the Wall Street finance universe applies to industrials. Shifting risk is no substitute for reducing risk.
Sunday, December 6, 2009
Teeter Tot: Third Quarter Stable at the Brink
There's good news of sorts from the third quarter data. The risk distribution of the banking system looks to be in a holding pattern. Life is still full of pain of course. Credit availability remains tight. The prospect for more mortgage losses in 2010 remains looming. Leveraging vehicles for finance are sparse. And the valuation of the real assets underlying capital continues to shrink. But here's the good news. There's a pattern to the pain. The volatility and uncertainty surrounding much of 2009 has morphed to a collection of set piece issues. And that gives me some hope because set piece battles are things we can begin to work on. We Americans tend to be as good at tactical problem solving as we are bad at strategic vision. But this means that overall our problems are moving towards our strenghts rather than our weaknesses.
The risk map at the end of September 2000 was as follows,
And asset distributions are,
The risk map is roughly identical from 2Q2009 to 3Q2009 give or take a little because of continued but now predictable hemmoraging. So where are America's challenges ahead?
Do we have the political will to do the right thing?
Bringing Wall Street back into the service of Main Street remains elusive. Finance remains a universe separate from the rest of our reality. The excesses of a decade and a half of "financial innovation" have been exposed but the inertia behind the collapse continues to fight on delaying the finance system's reintegration into mainstream society. What else can you say when you witness artifacts such as a stock market that pushes up prices on the arithmetic of expense management paid for by the unemployed and underemployed. Or a derivatives market so steeped in its' habits that it remains hell bent on preventing the kind of transparency that would help ensure the debacle we are living through won't happen again? These are not economic fundamentals, they are social and political risks that this nation cannot afford. The Administration and Congress are by now well aware of these forces and their effects. There is no reason the citizenry should not expect our leaders to do the right thing.
Refocusing industry incentives to make things right.
Just under 2/3rd's of the banking industry's assets lives in the A+/A/B stress range according to our calculations. The remainder have issues clearly requiring some degree of extraordinary administration. But so far, the remediation efforts of the United States remain piecemeal and nearest I can tell, overly focused on a few large entities that fall within the fashionable coverage limit of the major news bureaus. We have so far failed to systemically tap into the single largest source of recovery strength we have, the healthier banks. They are there but they are hamstrung from acting lumped in with the weaker and louder players who's calls for mercy and aid via taxpayer dollars retain our attention. In my job I see and talk to some of these A+/A/B banks and even some really smart C grade banks on the mend that struggle to take advantage of their positional strengths. But what should be a downhill run competitive advantage is an uphill struggle for the best of breed. So here's the challenge to our leadership. Refocus the process from a smattering of narrowly selective aid packages to a tidal of movement to change the nature of the industry so it gets back to an 80 good/ 20 bad ratio. This will involve a much larger shifting of impaired assets to sound foundations. It will undoubtedly manifest as a newsworthty mix of debacles and recombinations. But we need to return to a process of natural selection based on value instead of clout.
Make Main Street the political priority already.
We cannot make lemonade from rotting lemons. You can take comfort deluding yourself looking at day to day economic indicators but the reality is that as of September 2009 the total amount of bank balance sheet real estate loans outstanding by FDIC reporting banks was around $4.5 trillion dollars. That is about the same amount as it was in March 2007. It peaked at a high of $4.8 trillion in March 2008 just as the "crisis" was becoming common knowledge to America.
But here's the thing. In 2007 the annualized default rate on these loans was 11.8 basis points. Today it's 194.3 bp. Main street home ownership is struggling. Let's look at a few more then and now comparisons.
The risk map at the end of September 2000 was as follows,
IRA Bank Stress Grade Distributions
|
And asset distributions are,
IRA Bank Assets Stress Distributions
|
The risk map is roughly identical from 2Q2009 to 3Q2009 give or take a little because of continued but now predictable hemmoraging. So where are America's challenges ahead?
Do we have the political will to do the right thing?
Bringing Wall Street back into the service of Main Street remains elusive. Finance remains a universe separate from the rest of our reality. The excesses of a decade and a half of "financial innovation" have been exposed but the inertia behind the collapse continues to fight on delaying the finance system's reintegration into mainstream society. What else can you say when you witness artifacts such as a stock market that pushes up prices on the arithmetic of expense management paid for by the unemployed and underemployed. Or a derivatives market so steeped in its' habits that it remains hell bent on preventing the kind of transparency that would help ensure the debacle we are living through won't happen again? These are not economic fundamentals, they are social and political risks that this nation cannot afford. The Administration and Congress are by now well aware of these forces and their effects. There is no reason the citizenry should not expect our leaders to do the right thing.
Refocusing industry incentives to make things right.
Just under 2/3rd's of the banking industry's assets lives in the A+/A/B stress range according to our calculations. The remainder have issues clearly requiring some degree of extraordinary administration. But so far, the remediation efforts of the United States remain piecemeal and nearest I can tell, overly focused on a few large entities that fall within the fashionable coverage limit of the major news bureaus. We have so far failed to systemically tap into the single largest source of recovery strength we have, the healthier banks. They are there but they are hamstrung from acting lumped in with the weaker and louder players who's calls for mercy and aid via taxpayer dollars retain our attention. In my job I see and talk to some of these A+/A/B banks and even some really smart C grade banks on the mend that struggle to take advantage of their positional strengths. But what should be a downhill run competitive advantage is an uphill struggle for the best of breed. So here's the challenge to our leadership. Refocus the process from a smattering of narrowly selective aid packages to a tidal of movement to change the nature of the industry so it gets back to an 80 good/ 20 bad ratio. This will involve a much larger shifting of impaired assets to sound foundations. It will undoubtedly manifest as a newsworthty mix of debacles and recombinations. But we need to return to a process of natural selection based on value instead of clout.
Make Main Street the political priority already.
We cannot make lemonade from rotting lemons. You can take comfort deluding yourself looking at day to day economic indicators but the reality is that as of September 2009 the total amount of bank balance sheet real estate loans outstanding by FDIC reporting banks was around $4.5 trillion dollars. That is about the same amount as it was in March 2007. It peaked at a high of $4.8 trillion in March 2008 just as the "crisis" was becoming common knowledge to America.
But here's the thing. In 2007 the annualized default rate on these loans was 11.8 basis points. Today it's 194.3 bp. Main street home ownership is struggling. Let's look at a few more then and now comparisons.
- In March 2007, 30-89 Day overdue loans was $43.7 billion. Today, it's $100.8 billion.
- Over 90 Day overdue loans were $11.2 billion in 2Q2007; today that figute is up to $88 billion.
- Non-Accrual residential real estate loans were $29.2 billion in March 2007; we are at $202 billion now.
- And bank real estate owned was $6.9 billion in March 2007. Today banks own $37 billion worth of real estate.
The challenge is pretty clear. The degraded real estate portfolio of America's banks massive and does not yet shows no signs of abating. Surrounding this challenging financial scenario is a loan modification program that by best estimates will work for no more than 1/3rd of the problem. An infrastructure solution needs to be found for the balance of the U.S. homeownership problem. Banks saddled with such problems cannot lend and therefore cannot help re-stimulate the economy. In economic terms this is a massive downward accelerating force if not dealt with. Numerous proposals surrounding this subject abound as we reach the end of 2009. None yet cohesive enough to represent anything amounting to a solution. We have a collective choice to focus on it or not.
Friday, September 11, 2009
As Subsidies Subside
So here we are on another September 11th.
Today I’m pondering next week’s expected beginning of the removal of government subsidies from the U.S. banking system. The stock market has been showing off its’ new found love for driving up equities regardless of the fact that computed stockholder’s equity numbers are now driven not by top line revenue improvements but by the modeled mathematics of cutting back on expenses. According to the Wall Street Journal, economists buoy about the world getting better. Exactly for whom I’m not quite sure because unemployment benefits are soon to permanently run out on people (and their families) for whom these same economists say no jobs are forthcoming for at least another year. I'm not sure I would advise the President to stand between the pitchfork wielding public and the “Black Swan” academicians with Christmas approaching.
And so into this "theoretically improving" world President Obama is expected to inform Wall Street next week that the one of the government's bank subsidy programs ends in October. The Troubled Loan Guarantee Program (TLGP) is a less well known subsidy vehicle than the Troubled Asset Relief Program (TARP) but it is nevertheless one of the pillars of the rescue plan that was put into place by the combined efforts of the Bush/Obama administrations.
TLGP is another one of those things that never really took off in the way people imagined it would. Like TARP it was meant to encourage banks to continue to lend under extraordinarily stressful conditions. However, we’ve all seen that credit availability dried up anyway because ultimately banks backed away from subprime lending as they collectively de-leveraged and shut down the exposure manufacturing aspects of their business models. So because there was no new lending the opportunities to make use of TLGP by the industry were relatively sparse.
So now here’s where it gets a little interesting.
Over the past year we’ve been tracking the system wide trends in defaults, non-accruals and finally other assets owned by banks and we’ve been seeing continued degradations in net lending assets quality. That means that the business need to eventually take advantage of trouble loan guarantees has been growing not receding. The TLGP concept may have been instituted before it’s time and that time may be still be in the future, probably not that far. One might ask, “are we pondering confiscating subsidy tools just as banks might be on the verge of using them?” And of course the even more fun questions "Why?" and “Is this a good idea?”
Of the 8,800 or so active bank units reporting to the FDIC around 3,500 or so have formally opted-out of the TLGP. Yes there’s a list floating around out there that has double that number but if you look real closely people that list has many banks listed twice, once under its’ FDIC Certificate ID and again under its’ Federal Bank Holding Company identifier. So that means 5,300’ish of the brethren have stayed silent on their intentions. This includes most of the bigger banks by the way. It they all activated under the program the Unites States government could quickly find itself running out of another kind of clunker money pool. TLGP extension by exception means a lot of case-by-case evaluation workload for the FDIC’s staff.
Could you put that in English please Mr. Santiago, "I think it means someone is setting up a high hurdle filter."
To be honest one can argue that banks have had ample time these past months to ponder their business positions and make their plans on how they will steer their way into the second decade of the 21st century. Apparently it’s time to test their mettle and let the forces of competition winnow the winners from the losers. If this is so, making TLGP extensions available only to those with true survivor potential as opposed to keeping the program open for zombies actually has national policy merit … as long as it’s applied objectively that is.
To me this means that the administration may be preparing to send a potentially uncomfortable message to Wall Street that it wants to begin to divert capital away from obsessing on artificially floating up the DJIA and redirect it back into economy building uses of private capital. By making it so that banks will soon need such private capital to survive the anticipated loss scenarios of 2010 it means that only collective and focused investment as a cadent nation of citizens can stave off the further withering of a weakened broader economy. It’s a glitch that changes the where and how the nation’s wealth reserves are to be employed. Pretty gutsy move. Wake up and smell that coffee!
“A déjà vu means they’ve made a change in the matrix.”
Today I’m pondering next week’s expected beginning of the removal of government subsidies from the U.S. banking system. The stock market has been showing off its’ new found love for driving up equities regardless of the fact that computed stockholder’s equity numbers are now driven not by top line revenue improvements but by the modeled mathematics of cutting back on expenses. According to the Wall Street Journal, economists buoy about the world getting better. Exactly for whom I’m not quite sure because unemployment benefits are soon to permanently run out on people (and their families) for whom these same economists say no jobs are forthcoming for at least another year. I'm not sure I would advise the President to stand between the pitchfork wielding public and the “Black Swan” academicians with Christmas approaching.
And so into this "theoretically improving" world President Obama is expected to inform Wall Street next week that the one of the government's bank subsidy programs ends in October. The Troubled Loan Guarantee Program (TLGP) is a less well known subsidy vehicle than the Troubled Asset Relief Program (TARP) but it is nevertheless one of the pillars of the rescue plan that was put into place by the combined efforts of the Bush/Obama administrations.
TLGP is another one of those things that never really took off in the way people imagined it would. Like TARP it was meant to encourage banks to continue to lend under extraordinarily stressful conditions. However, we’ve all seen that credit availability dried up anyway because ultimately banks backed away from subprime lending as they collectively de-leveraged and shut down the exposure manufacturing aspects of their business models. So because there was no new lending the opportunities to make use of TLGP by the industry were relatively sparse.
So now here’s where it gets a little interesting.
Over the past year we’ve been tracking the system wide trends in defaults, non-accruals and finally other assets owned by banks and we’ve been seeing continued degradations in net lending assets quality. That means that the business need to eventually take advantage of trouble loan guarantees has been growing not receding. The TLGP concept may have been instituted before it’s time and that time may be still be in the future, probably not that far. One might ask, “are we pondering confiscating subsidy tools just as banks might be on the verge of using them?” And of course the even more fun questions "Why?" and “Is this a good idea?”
Of the 8,800 or so active bank units reporting to the FDIC around 3,500 or so have formally opted-out of the TLGP. Yes there’s a list floating around out there that has double that number but if you look real closely people that list has many banks listed twice, once under its’ FDIC Certificate ID and again under its’ Federal Bank Holding Company identifier. So that means 5,300’ish of the brethren have stayed silent on their intentions. This includes most of the bigger banks by the way. It they all activated under the program the Unites States government could quickly find itself running out of another kind of clunker money pool. TLGP extension by exception means a lot of case-by-case evaluation workload for the FDIC’s staff.
Could you put that in English please Mr. Santiago, "I think it means someone is setting up a high hurdle filter."
To be honest one can argue that banks have had ample time these past months to ponder their business positions and make their plans on how they will steer their way into the second decade of the 21st century. Apparently it’s time to test their mettle and let the forces of competition winnow the winners from the losers. If this is so, making TLGP extensions available only to those with true survivor potential as opposed to keeping the program open for zombies actually has national policy merit … as long as it’s applied objectively that is.
To me this means that the administration may be preparing to send a potentially uncomfortable message to Wall Street that it wants to begin to divert capital away from obsessing on artificially floating up the DJIA and redirect it back into economy building uses of private capital. By making it so that banks will soon need such private capital to survive the anticipated loss scenarios of 2010 it means that only collective and focused investment as a cadent nation of citizens can stave off the further withering of a weakened broader economy. It’s a glitch that changes the where and how the nation’s wealth reserves are to be employed. Pretty gutsy move. Wake up and smell that coffee!
“A déjà vu means they’ve made a change in the matrix.”
Monday, August 31, 2009
After Six Months, Deja Vu
The first half of 2009 has certainly seen an extraordinary outpouring of big government flexing the power of treasure and policy to alter the course of a business cycle. U.S. taxpayers and the world have been asked to participate in a massive co-investment of mind over matter. So has it worked? Has the government indeed shifted the stress profile of the banking system to safer ground?
Unfortunately looking at the 2Q2009 industry stress distribution numbers based on the latest FDIC research master file the numbers tell a tale of doubt. Table 1 shows the population distribution of IRA bank stress indices computed over the weekend. The data includes every active bank in the United States for the end of 2Q.
At first glance you might not see much change. The return to 2008 reveals dramatically looking at the asset values of the institutions in each stress bucket. One does indeed see a bump of improvement at the end of 1Q2009 no doubt due to the combined gallant efforts of the administration and the one before it. But I have to report with what I will admit is a sinking heart that it's all but evaporating according to the second quarter results. We are back to the stress patterns of 2008.
So where are we? Where are the big banks in all this one might ask? Generally, that would be them beginning to pile up in and around column B country. The regional and community banks remain split in a barbell pattern that's been emerging for some time.
Mission Element Need Assessment
Any analyst who isn't in complete denial about being on planet earth should clearly see at this point that a one size fits all unified theory of problem solving is a load of hooey. We now have on our hands a much more complex battle with at least three elements that need to be maneuvered cleverly if this is to turn out alright.
The A+/A's are our economy's anchor. We need to make sure they are advantaged to capture market share and rebuild our foundation to good operating standards. They aren't necessarily the politically connected. But I do not believe the other two legs of banking can survive without them. Left to me, this is where I'd design the most favorable incentives to encourage private investments. Why here? Because it creates implied financial forces to herd the other two groups towards safer and sounder outcomes.
The B/C banks are the one's still carrying excess leverage from the prior business cycle. We need to bring them back to earth in a controlled fashion. Destroying them is not an option. Though wounded, they are still a tool with a real purpose in our economic landscape. Rather, we need to mend and reposition them so that their penchant for chasing great opportunities can be recycled to help power the next leap of the American dream.
The D/F banks are the great turnaround opportunity of our economy. These are the institutions whose business models have become so mismatched to current conditions that it's showing in red ink net incomes, hazardous exposures to government advances, and unsightly loan loss scenarios. These are the banks that will require the iron hand of the Banking Act reborn to restore discipline to safe and sound principles. Turn them around we must for the sake of our own peace of mind. Mark my words, for each 5% of them we fix we'll feel a quantum of joy better about life in these United States.
The search for solutions goes on.
Unfortunately looking at the 2Q2009 industry stress distribution numbers based on the latest FDIC research master file the numbers tell a tale of doubt. Table 1 shows the population distribution of IRA bank stress indices computed over the weekend. The data includes every active bank in the United States for the end of 2Q.
Table 1: IRA Bank Stress Index (BSI) Grade Distributions
|
At first glance you might not see much change. The return to 2008 reveals dramatically looking at the asset values of the institutions in each stress bucket. One does indeed see a bump of improvement at the end of 1Q2009 no doubt due to the combined gallant efforts of the administration and the one before it. But I have to report with what I will admit is a sinking heart that it's all but evaporating according to the second quarter results. We are back to the stress patterns of 2008.
Table 2: IRA Bank Stress Assets Distributions
|
So where are we? Where are the big banks in all this one might ask? Generally, that would be them beginning to pile up in and around column B country. The regional and community banks remain split in a barbell pattern that's been emerging for some time.
Mission Element Need Assessment
Any analyst who isn't in complete denial about being on planet earth should clearly see at this point that a one size fits all unified theory of problem solving is a load of hooey. We now have on our hands a much more complex battle with at least three elements that need to be maneuvered cleverly if this is to turn out alright.
The A+/A's are our economy's anchor. We need to make sure they are advantaged to capture market share and rebuild our foundation to good operating standards. They aren't necessarily the politically connected. But I do not believe the other two legs of banking can survive without them. Left to me, this is where I'd design the most favorable incentives to encourage private investments. Why here? Because it creates implied financial forces to herd the other two groups towards safer and sounder outcomes.
The B/C banks are the one's still carrying excess leverage from the prior business cycle. We need to bring them back to earth in a controlled fashion. Destroying them is not an option. Though wounded, they are still a tool with a real purpose in our economic landscape. Rather, we need to mend and reposition them so that their penchant for chasing great opportunities can be recycled to help power the next leap of the American dream.
The D/F banks are the great turnaround opportunity of our economy. These are the institutions whose business models have become so mismatched to current conditions that it's showing in red ink net incomes, hazardous exposures to government advances, and unsightly loan loss scenarios. These are the banks that will require the iron hand of the Banking Act reborn to restore discipline to safe and sound principles. Turn them around we must for the sake of our own peace of mind. Mark my words, for each 5% of them we fix we'll feel a quantum of joy better about life in these United States.
The search for solutions goes on.
Monday, June 1, 2009
300 or 2,000? How can we change destiny?
At the end of every nightmare, a new day dawns. - D. Santiago
This observation about bank stress trends from the IRA Newsletter garnered some attention.
"At the current rate of deterioration, that could put the Stress Score for the entire industry over 10 by Q4 2009 or a full order of magnitude above the 1995 baseline. Such a worst case scenario suggests that we could see one in four US banks merged or resolved through the cycle. In the event, that suggests that over 2,000 institutions, large and small, will be resolved. Put that into context with the FDIC's "official" dead pool of 300 or so institutions and that gives you a tangible measure for how much "spin" might live within the official version of the problems facing the US banking industry."
One email from a respected reporter asked,
"Is this the same thing as saying one in four banks may fail? How realistic is it to assume what the data suggests? What specificially would drive so many banks out of existence? In other words, what's their Achilles heel in your judgment?"
When a bank fails it is resolved, that is, merged by government edict into another "healthier" institution. Yes it is possible that we will see a good portion of now weakened banks become the subject of a merger feeding frenzy later this year. This could indeed lead to the emergence of a smaller industry populated by larger more economically resilient and politically powerful companies. Some people believe that it's a good thing to concentrate banking power into a more consolidated industry. Me? I just see fewer banks charging higher fees for basic services.
What the IRA analyis of 1Q2009 FDIC data is saying is that lacking any improvement in the infrastructure that supports banking, our analysis indicates that the deterioration of the industry will continue to spread potentially affecting a larger population of institutions as the year progresses.
As has been stated in previous observations, banks have been migrating down the path towards weaker net incomes as a result of stalled lending engines and ballooning anticipated losses on existing loans. The pursuit of good lending begins to look more like balance transferrals instead of true blue new loans that expand the U.S. economy. Anything riskier carries the stigma of being just another balance sheet item eventually headed for the REO pile. It's not easy to make a living under such conditions and the biological sustainment capacity answer is that the population must shrink to equilibrate with the environment.
Dude I don't like that answer either. There's no reason why a country like the United States of America should "equilibrate" to a lower quality of life at this stage in our history. It just does not make sense to me that we'd let something like this happen when we have it in our power to create a different destiny.
The Achilles heel in this equation is the bastard cousin of banking ... finance. Finance is the leverage we create to make our money do more for us. It is a powerful and dangerous tool that can both create and be driven by good and evil. Behind banking's ailments is the fact that securitization, a central element in leveraging the operational processes of main street banking, is now dormant. Driven by greed and excess, it's caretakers have been driven into discredit and trust in it has evaporated. Entire industries that enabled it have ceased to exist in the last 24 months. What's left of it is stored in Federal financial toxic meat lockers. We've done all this at the very peril of our quality of life.
The fact of the matter is that unless we get the financial engines supporting our banking product inventory restarted in some rational fashion banking will continue to de-leverage. Does that mean giving the greedy back their licenses to steal candy from babies? Of course not. What I think it does mean is making a national effort to construct the apparatus to deliver a new range of financial vehicles to enable banking to do it's job again. And do it at a quality of life target design point at oh say "the pursuit of happiness" once more.
And so begins the search for a new dawn.
This observation about bank stress trends from the IRA Newsletter garnered some attention.
"At the current rate of deterioration, that could put the Stress Score for the entire industry over 10 by Q4 2009 or a full order of magnitude above the 1995 baseline. Such a worst case scenario suggests that we could see one in four US banks merged or resolved through the cycle. In the event, that suggests that over 2,000 institutions, large and small, will be resolved. Put that into context with the FDIC's "official" dead pool of 300 or so institutions and that gives you a tangible measure for how much "spin" might live within the official version of the problems facing the US banking industry."
One email from a respected reporter asked,
"Is this the same thing as saying one in four banks may fail? How realistic is it to assume what the data suggests? What specificially would drive so many banks out of existence? In other words, what's their Achilles heel in your judgment?"
When a bank fails it is resolved, that is, merged by government edict into another "healthier" institution. Yes it is possible that we will see a good portion of now weakened banks become the subject of a merger feeding frenzy later this year. This could indeed lead to the emergence of a smaller industry populated by larger more economically resilient and politically powerful companies. Some people believe that it's a good thing to concentrate banking power into a more consolidated industry. Me? I just see fewer banks charging higher fees for basic services.
What the IRA analyis of 1Q2009 FDIC data is saying is that lacking any improvement in the infrastructure that supports banking, our analysis indicates that the deterioration of the industry will continue to spread potentially affecting a larger population of institutions as the year progresses.
As has been stated in previous observations, banks have been migrating down the path towards weaker net incomes as a result of stalled lending engines and ballooning anticipated losses on existing loans. The pursuit of good lending begins to look more like balance transferrals instead of true blue new loans that expand the U.S. economy. Anything riskier carries the stigma of being just another balance sheet item eventually headed for the REO pile. It's not easy to make a living under such conditions and the biological sustainment capacity answer is that the population must shrink to equilibrate with the environment.
Dude I don't like that answer either. There's no reason why a country like the United States of America should "equilibrate" to a lower quality of life at this stage in our history. It just does not make sense to me that we'd let something like this happen when we have it in our power to create a different destiny.
The Achilles heel in this equation is the bastard cousin of banking ... finance. Finance is the leverage we create to make our money do more for us. It is a powerful and dangerous tool that can both create and be driven by good and evil. Behind banking's ailments is the fact that securitization, a central element in leveraging the operational processes of main street banking, is now dormant. Driven by greed and excess, it's caretakers have been driven into discredit and trust in it has evaporated. Entire industries that enabled it have ceased to exist in the last 24 months. What's left of it is stored in Federal financial toxic meat lockers. We've done all this at the very peril of our quality of life.
The fact of the matter is that unless we get the financial engines supporting our banking product inventory restarted in some rational fashion banking will continue to de-leverage. Does that mean giving the greedy back their licenses to steal candy from babies? Of course not. What I think it does mean is making a national effort to construct the apparatus to deliver a new range of financial vehicles to enable banking to do it's job again. And do it at a quality of life target design point at oh say "the pursuit of happiness" once more.
And so begins the search for a new dawn.
Wednesday, May 6, 2009
Preliminary Q1 2009 Stress Test Results: Significant Increase in Stress Across the Banking Industry
UPDATED: May 6, 2009
“Young man sometimes the only way to win is to lose gracefully.”
Technology Innovation That Actually Works
We admire the Federal Deposit Insurance Corporation for many reasons. This month, we applaud them once again for the fine job they have done to bring the Central Data Repository (CDR) online in a way that serves the growing public demand for timely US bank data. Made operational just in January of 2009, we’ve just collected Q1 2009 CALL reports for over 7,600 reporting units, a goodly portion of which came out of submittal confirmation only a couple of days ago.
These CALL reports are submitted to the FDIC during a 30 day submission window beginning the first day of the quarter. We’ve been testing a variation of IRA’s ratings analyzer on these Q1 CALL’s since April 1st. The result is that IRA is now positioned to deliver preliminary bank stress estimates for the new quarter roughly two to three weeks ahead of the FDIC’s mid-quarter research master file release. Based on this maiden run, we are pleased to report that the FDIC’s CDR engine has the potential to enable a quantum leap in granularity looking at the U.S. banking industry.
Coupled with our analyzers, it’s possible to generate analysis on bank units as they file their CALL’s and, based our findings, generate a industry picture in around 36 to 48 hours after the close of the CALL submittal window. That’s pretty good!
Stable Pie Slices, But Dramatic Increase in Banking Industry Stress
Based on looking at sample set of around 91% of the test population used in Q4 2008, we observe that the distribution of IRA Bank Stress Rating grades for Q1 2009 retains the roughly 2/3rd to 1/3rd ratio of banks with A+/A grades versus elevated stress institutions IRA detected was characteristic of the banking industry throughout 2008.
We see indicators of a continued migration of banks from the A+ range where stress fall below the index Dec-1995 = 1.0 start mark into the A range indicating more banks are now feeling the effects of economic conditions regardless of the business practice models they’ve had in place.
At this time we do not know what the disposition of the remaining 750 or so institutions that are not in the CDR as of 5/3/2009. We have not yet had a chance to determine who these missing units are.
At first glance the situation as of Q1 2009 may seem to be getting better. But it’s not. In prior quarters, banks wound up getting “F” grades because they were barely making money; that is, they had small but positive net incomes that produced ROE’s sufficiently below industry averages to indicate elevated business operating stress. A lot of these institutions were suffering due to mark-to-market accounting, goodwill write-downs and other ROE issues.
In Q1 2009, the data indicates a dramatic climb in the industry aggregate average Bank Stress Index from 1.8 at the end of Q4 2008 to a whopping 5.57 coming out of 1Q 2009 or half an order or magnitude above the 1995 benchmark. The reason for this is the number of banks who delivered negative net incomes in the first quarter of 2009, one thousand five hundred fifty-seven (1,557) of them as updated on our system after the data run on May 5, 2009.
Keep in mind what the Q1 2009 FDIC data is saying: Even with the change in the FASB rule for M2M accounting, and Fed liquidity programs, the leading factor driving higher industry stress scores remains ROE degradation, not charge-offs or operational factors such as efficiency. When charge-offs are the leading factor in the IRA Banking Stress Index, then the industry will be through the worst.
The Q1 2009 results calculated by IRA are looking a little like a table from the CDC’s H1N1 confirmed laboratory cases page. Our overall observation is that U.S. policy makers may very well have been distracted by focusing on 19 large stress test banks designed to save Wall Street and the world’s central bank bondholders, this while a trend is emerging of a going concern viability crash taking shape under the radar.
We’ve noted in the past that US banks have been migrating down the quality slope taking an average of 9 months to complete the journey from “A” to “F” on the stress scale. The story is predictable. It begins with business losses and recriminations. This is followed by lending engine contraction as the propensity to create exposure narrows towards risk aversion and “quality lending” exclusivity. This is a rare diet to try to live on in these times. The bank, which makes its’ living wage from the interest it collects from its’ lending engine slowly starves.
At a certain point the carry cost of the infrastructure outweighs the earnings rate. Then you start to see strange shifts to seek incremental income from service fees, a move that often only serves to increase customer reluctance and mistrust. The end result is a stressed business model that can only be remedied by getting the core business, its’ lending engine, running again.
Counting the fourth quarter of 2007 when IRA’s data indicates this phenomenon began to emerge, we are now eighteen (18) months or one-half of a business cycle dragging this massive boat anchor the behind the US economy. We may have wasted valuable time trying to save Wall Street at the cost of Main Street.
At this point the reasons no longer matter. It’s time to win by thinking gracefully. The numbers indicate we need to seriously ask the question as to whether economic recovery for the United States can still come just from repairing Wall Street – or whether instead we should be worried about addressing the underlying loss rates that are driving the provisioning behind these poor ROE results. Has the time come to shift the policy focus away from the things that we love, namely big zombie banks, to tackle things that are truly hurting us?
Readouts on all 7,519 bank units collected by IRA to date are now available to our Advisory Clients. The Beta version of unit level preliminary indicators now appears in the IRA Bank Monitor for Professionals. Preliminary grade indicators appear in pink if available. It will begin to appear in the IRA Bank Ratings Service for Consumers as soon as Beta testing is completed. IRA is presently working on adapting the accompanying bank-holding company (BHC) extension of our ratings system to also feed from CDR collected preliminary data. We continue to support our “prime solution” philosophy that it takes everyone with fair, equal and transparent access to risk information to collectively guide our economy to recovery.
“Young man sometimes the only way to win is to lose gracefully.”
Gen. Bill Creech, Commander,
USAF Tactical Air Command
to Dennis Santiago years ago
Technology Innovation That Actually Works
We admire the Federal Deposit Insurance Corporation for many reasons. This month, we applaud them once again for the fine job they have done to bring the Central Data Repository (CDR) online in a way that serves the growing public demand for timely US bank data. Made operational just in January of 2009, we’ve just collected Q1 2009 CALL reports for over 7,600 reporting units, a goodly portion of which came out of submittal confirmation only a couple of days ago.
These CALL reports are submitted to the FDIC during a 30 day submission window beginning the first day of the quarter. We’ve been testing a variation of IRA’s ratings analyzer on these Q1 CALL’s since April 1st. The result is that IRA is now positioned to deliver preliminary bank stress estimates for the new quarter roughly two to three weeks ahead of the FDIC’s mid-quarter research master file release. Based on this maiden run, we are pleased to report that the FDIC’s CDR engine has the potential to enable a quantum leap in granularity looking at the U.S. banking industry.
Coupled with our analyzers, it’s possible to generate analysis on bank units as they file their CALL’s and, based our findings, generate a industry picture in around 36 to 48 hours after the close of the CALL submittal window. That’s pretty good!
Stable Pie Slices, But Dramatic Increase in Banking Industry Stress
Based on looking at sample set of around 91% of the test population used in Q4 2008, we observe that the distribution of IRA Bank Stress Rating grades for Q1 2009 retains the roughly 2/3rd to 1/3rd ratio of banks with A+/A grades versus elevated stress institutions IRA detected was characteristic of the banking industry throughout 2008.
| Q1 2009 Preliminary IRA Bank Stress Rating Grade Distribution (Based on data for 7,519 bank units from the FDIC CDR*) Source: FDIC/IRA Bank Monitor | ||
| IRA Bank Stress Grade | 2009 Q1* | 2008 Q4 |
| A+ | 3362 | 3918 |
| A | 1909 | 1705 |
| B | 135 | 119 |
| C | 411 | 390 |
| D | 87 | 98 |
| F | 1615 | 2003 |
| There were an additional 108 banks in the initial data set that were found to have some holes in the data thus preventing computation for the preliminary analysis run. | ||
We see indicators of a continued migration of banks from the A+ range where stress fall below the index Dec-1995 = 1.0 start mark into the A range indicating more banks are now feeling the effects of economic conditions regardless of the business practice models they’ve had in place.
At this time we do not know what the disposition of the remaining 750 or so institutions that are not in the CDR as of 5/3/2009. We have not yet had a chance to determine who these missing units are.
| IRA Historical Bank Stress Grade Distributions based on FDIC Research Master Files Source: FDIC/IRA Bank Monitor | ||||||
| Period | A+ | A | B | C | D | F |
| 2008 12 | 3,918 | 1,705 | 119 | 390 | 98 | 2,003 |
| 2008 09 | 4,498 | 1,325 | 283 | 356 | 63 | 1,793 |
| 2008 06 | 4,884 | 1,248 | 404 | 326 | 66 | 1,458 |
| 2008 03 | 5,167 | 1,042 | 578 | 334 | 68 | 1,233 |
| 2007 12 | 5,556 | 610 | 884 | 315 | 70 | 1,029 |
| 2007 09 | 5,931 | 395 | 950 | 274 | 37 | 902 |
| 2007 06 | 6,056 | 354 | 972 | 273 | 60 | 824 |
| 2007 03 | 6,075 | 304 | 1,057 | 284 | 63 | 795 |
| 2006 12 | 6,370 | 134 | 1,165 | 204 | 39 | 697 |
| 2006 09 | 6,666 | 29 | 1,108 | 198 | 44 | 628 |
| 2006 06 | 6,729 | 0 | 1,155 | 194 | 35 | 613 |
| 2006 03 | 6,752 | 2 | 1,131 | 187 | 39 | 608 |
At first glance the situation as of Q1 2009 may seem to be getting better. But it’s not. In prior quarters, banks wound up getting “F” grades because they were barely making money; that is, they had small but positive net incomes that produced ROE’s sufficiently below industry averages to indicate elevated business operating stress. A lot of these institutions were suffering due to mark-to-market accounting, goodwill write-downs and other ROE issues.
In Q1 2009, the data indicates a dramatic climb in the industry aggregate average Bank Stress Index from 1.8 at the end of Q4 2008 to a whopping 5.57 coming out of 1Q 2009 or half an order or magnitude above the 1995 benchmark. The reason for this is the number of banks who delivered negative net incomes in the first quarter of 2009, one thousand five hundred fifty-seven (1,557) of them as updated on our system after the data run on May 5, 2009.
Keep in mind what the Q1 2009 FDIC data is saying: Even with the change in the FASB rule for M2M accounting, and Fed liquidity programs, the leading factor driving higher industry stress scores remains ROE degradation, not charge-offs or operational factors such as efficiency. When charge-offs are the leading factor in the IRA Banking Stress Index, then the industry will be through the worst.
| Number of Bank Units with Negative Net Income in 1Q2008 by State updated as of May 5, 2009 Source: FDIC CDR/IRA Bank Monitor | |
| AL | 27 |
| AR | 11 |
| AZ | 39 |
| CA | 135* |
| CO | 27 |
| CT | 12 |
| DC | 4* |
| DE | 11 |
| FL | 149* |
| GA | 139* |
| HI | 1 |
| IA | 29 |
| ID | 5 |
| IL | 108* |
| IN | 10 |
| KA | 1 |
| KS | 37 |
| KY | 20 |
| LA | 11 |
| MA | 27 |
| MD | 16 |
| MI | 53 |
| MN | 77 |
| MO | 64* |
| MS | 7 |
| MT | 10 |
| NC | 36* |
| ND | 10 |
| NE | 27 |
| NH | 4 |
| NJ | 26 |
| NM | 5 |
| NV | 23 |
| NY | 30* |
| OH | 22 |
| OK | 19 |
| OR | 14 |
| PA | 41 |
| PR | 2 |
| RI | 3 |
| SC | 18 |
| SD | 8 |
| TN | 33* |
| TX | 89* |
| UT | 23* |
| VA | 20 |
| WA | 49* |
| WI | 22 |
| WV | 1 |
| WY | 2 |
| * items updated since 5-3-2008. Please note that th FDIC CDR system continues to release data. The definitive lock down of quarterly numbers happens when the research masterfile is released later this month. | |
The Q1 2009 results calculated by IRA are looking a little like a table from the CDC’s H1N1 confirmed laboratory cases page. Our overall observation is that U.S. policy makers may very well have been distracted by focusing on 19 large stress test banks designed to save Wall Street and the world’s central bank bondholders, this while a trend is emerging of a going concern viability crash taking shape under the radar.
We’ve noted in the past that US banks have been migrating down the quality slope taking an average of 9 months to complete the journey from “A” to “F” on the stress scale. The story is predictable. It begins with business losses and recriminations. This is followed by lending engine contraction as the propensity to create exposure narrows towards risk aversion and “quality lending” exclusivity. This is a rare diet to try to live on in these times. The bank, which makes its’ living wage from the interest it collects from its’ lending engine slowly starves.
At a certain point the carry cost of the infrastructure outweighs the earnings rate. Then you start to see strange shifts to seek incremental income from service fees, a move that often only serves to increase customer reluctance and mistrust. The end result is a stressed business model that can only be remedied by getting the core business, its’ lending engine, running again.
Counting the fourth quarter of 2007 when IRA’s data indicates this phenomenon began to emerge, we are now eighteen (18) months or one-half of a business cycle dragging this massive boat anchor the behind the US economy. We may have wasted valuable time trying to save Wall Street at the cost of Main Street.
At this point the reasons no longer matter. It’s time to win by thinking gracefully. The numbers indicate we need to seriously ask the question as to whether economic recovery for the United States can still come just from repairing Wall Street – or whether instead we should be worried about addressing the underlying loss rates that are driving the provisioning behind these poor ROE results. Has the time come to shift the policy focus away from the things that we love, namely big zombie banks, to tackle things that are truly hurting us?
Readouts on all 7,519 bank units collected by IRA to date are now available to our Advisory Clients. The Beta version of unit level preliminary indicators now appears in the IRA Bank Monitor for Professionals. Preliminary grade indicators appear in pink if available. It will begin to appear in the IRA Bank Ratings Service for Consumers as soon as Beta testing is completed. IRA is presently working on adapting the accompanying bank-holding company (BHC) extension of our ratings system to also feed from CDR collected preliminary data. We continue to support our “prime solution” philosophy that it takes everyone with fair, equal and transparent access to risk information to collectively guide our economy to recovery.
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