US bank failure and TBTF phenomenon
As the US stock market went gaga last Thursday (29th October) over the 2009 Q3 GDP data and many analysts upped their growth expectation for the year, the next day was a chilling reminder of the frost that engulfed the economy. According to Reuters, the US authorities seized nine failed banks on Friday (30th October), the most in a single day since financial crisis began. As a result, total bank failures in 2009 jumped to 115, the highest annual level since 1992.
This indeed is a reminder, if one is needed, that a great chunk of US banking industry is being impacted by bad loans. In fact, one ought to keep in mind that the saga if banks going down is yet to be concluded. More importantly, these banks are failing despite the assistance that the government has been giving.
A natural question to be asked is what is it that makes these banks fail while some of their more lucky brethren as fail safe, so to say? If one looks at the data made available by Federal Deposit Insurance Corporation (FDIC), the banks to fail are mostly small-sized regional banks. These are not big banks or banks that are considered Too Big to Fail. Apparently, banks that are TBTF cannot be allowed to fail since they pose a greater systemic risk for the financial world. Or maybe, they do not have well connected lenders with deep exposure, as is the case of AIG. The bailout money given to AIG was used to pay-off their lenders with zero haircut. If it would have been allowed to be bankrupt, the lenders would have necessarily been required to take haircut. In essence TBTF is the most sought after status as it allows financial institutions with rogue practices to survive the effect of their unhealthy business practice and continue in the same vein post recovery. Ignoring the plea of the FDIC Chairwoman Ms. Sheila Blair to prevent Financial Institutions from becoming TBTF (maybe by reducing their size), the current US administration is working on the draft Financial Stability Improvement Bill to address Systemic Risk posed by TBTF Institutions. This draft does not talk about ways and means to ensure that questionable business practices of banks or other financial institutions are put to a stop but rather talks of ways and means to bail them out, whenever necessary. And, clearly, the smaller and regional banks would continue to be at a disadvantage while the bigger ones have all the funding disadvantage and would continue to take high risk bets, that brought the economy to its knees on the first place.
In the end, while the smaller banks committing the same mistakes (as the bigger ones during the current crisis) are being made to bite the dust, the bigger ones are moving along with gay abandon and handing over fat bonuses to their employees in the bargain. Expect to see more bank (read small and regional) failures and the TBTFs becoming even bigger. And, oh yes, along the way expect to see more crisis being thrust upon us.
