Bank, Credit Union Failures: The Most Since 2002Other 'Troubled' Institutions May Follow, but Risk Management, Leadership Can Sustain Industry and Trust
Analysis of bank and credit union failures shows that 16 institutions -- eight banks and eight credit unions -- have failed so far this year. (See related list of bank and credit union failures for 2008) There were only five failures (three banks and two credit unions) in 2007, six (all credit unions) in 2006 and five (ditto) in 2005. Twelve banks failed in 2002, at the height of the most recent economic downturn. Which begs the question: How many others will fail in 2008, as a result of current economic conditions?
Industry experts say that this year's failures will not reach the levels seen during the savings and loan crisis in the early 1990s, when 747 savings and loans failed, costing about $160 billion -- $124 billion picked up by the federal government. A deregulated, money-losing industry (asset-liability mismatch) amid a real estate boom and loan trickery related to junk bonds also sped the demise of these savings and loans.
The Federal Deposit Insurance Corp. says it currently has 90 banks on its secret "watch list." Peter Cohan in his blog on AOL's Money & Finance predicts the list of 90 growing to 300 over the next three years. There are about 8,400 banks operating in the U.S. and about 8,000 credit unions. Based on independent analysis by Chris Whalen from Institutional Risk Analytics, 8 percent of all banks, or around 700 institutions, have been identified as "troubled."
Others in the industry see the future for some institutions as bleak, but manageable. "This is a time when we can fully expect there will be other banks that will have to be taken over by the FDIC," says Doug Johnson, Senior Policy Analyst at the American Bankers Association. Most times when a bank or credit union is closed, behind-the-scenes meetings with other banks or credit unions place the troubled institution on the auction block.
Whenever there is a bank that is troubled, the agencies, particularly driven by the FDIC (the insurer), have a process that has evolved, Johnson explains. This process has developed since the early 1990s to put the bids out to potential suitors, allowing those suitors to do their due diligence on the bank before the failure is announced, possibly setting up a takeover to be revealed simultaneously.
Johnson is very familiar with that process, having spent a number of years in the Florida State Department of banking during the late 1980s and early '90s, when there were a record number of banks that were closed. He doesn't see that happening this time.
"No way, shape or form do we anticipate anything like that here." The industry and public at large need to see the bigger picture, he adds. "There are 90 banks on the troubled bank list, but 99 % of banks are classified as 'well capitalized'. That doesn't mean that some of them won't suffer some level of capital impairment during this time, as credit quality continues to be a challenge," he concludes. But with the right risk management policies and management in place, most will be able to withstand this business cycle.
Johnson's observations echo what Mark O'Dell of the Office of the Comptroller of the Currency says is the challenge of maintaining IT risk management in a cost-cutting environment such as the one institutions face now because of the subprime mortgage fallout. O'Dell says it becomes incumbent upon those in charge of IT risk management to articulate what they bring to the bank, through helping reduce regulatory and reputational risk.