Bank Failures Will Continue As The Economy Improves

The chart above shows the American S&L failures over 15 years. This puts into historical perspective our current financial crisis. The common denominator? If you guessed real-estate speculation...you're correct. Ageing has few benefits and you often find yourself in a state of deja vu.

Three more U.S. banks failed on Friday, bringing the total to 84 so far this year, as the industry continues to grapple with deteriorating loans on their books.

112 Banks have failed over the last three years

FDIC Chairman Sheila Bair said this week that bank failures will remain elevated as banks go through the painful process of recognizing loan losses and cleaning up balance sheets. The total of 84 failures this year marks a sharp rise over the 25 last year, and the three failures in all of 2007.

She noted that the banking industry's performance is a lagging indicator and will continue to suffer even as the economy begins to improve.

2,935 small Savings & Loans institutions failed between 1979-94, setting the stage for the rise of big national banks

The U.S. is no stranger to prolonged periods of bank failures, the Great Depression resulted in many more failures. America experienced the loss of the Savings and Loan industry between 1987-91. More than 2,300 financial institutions went under peaking with the failure of 534 banks in 1989. This became know as the S&L debacle or S&L crisis.

Now those perdicting impending doom, that everyone wants to hear in a crisis, point out how the prime loan and commercial real-estate crisis is just picking up loss momentum this year. Well, they are correct. Lenny Dykstra could be the poster child for both problems. Read the Lenny Dykstra Bubble Signal.

But this comes as no suprise to students of past real-estate cycles. At the dusk of day you can count on it getting darker outside. And just as dusk leds to the darkness of night...night leds to day. To us old-timers this is deja vu all over again. Like the stock market the roaing 20's witness a great real-estate boom. We saw it again after WWII from the 50's to the 70's and again from the early 90's throught 2006.

Now a harder forecast to make is estimating the impact of this crisis on the stock market. That will need to be the subject of another Article. Still, one doesn't need to be a financial wizard to recall that one of the greatest 20 year booms in the market began during the 80's financial crisis.

While the size of assets is greater, the cost to FDIC will be less

So, how does this crisis compare to the S&L failures. It's too early to compare total failures as history teaches more are coming. In terms of assets, bank failures for 2008 totaled approximately $370 billion. This compares to approximately $164 billion in 1989, which was the worst year for the savings & loan debacle. If we adjusted that total for inflation, it would be roughly $300 billion today. So, 2008 is the worst in terms of assets for bank failures compared to the worst single year of the S&L crisis.

However, during the S&L crisis, bank failures hit nearly $150 billion or more per year for three years running. Total assets of failed institutions back then was $519 billion. If we adjust for inflation, we get a total in today’s dollars of over $800 billion. But, based upon the current 2009 trends and 2010 estimates this crisis would clearly be much worse than the S&L crisis.

The S&L Crisis cost FDIC $125 billion

While totaling up the assets of the failed banks is interesting, a more important point for taxpayers is what is the likely cost to the FDIC of taking over these banks? An FDIC report cited $124 billion as the cost to taxpayers for the S&L debacle. This includes costs to the Federal Savings and Loan Insurance Corporation (FSLIC) and the Resolution Trust Corporation (RTC).

The FDIC estimates this crisis will cost $70 billion

The FDIC estimate for the cost of taking over these banks is not $370 billion. The lastest estimate (Aug. 28th 2009) for the cost (projected through 2013) to the FDIC for these failures is $70 billion. That’s a lot of money, but still modest given the level of assets at the failed institutions. Still, given the FDIC has already doubled the size of forecasted losses in just 9 months it may be wise to assume 12 months from now the estimates could be even higher.

Even if we assume the FDIC is off by 50%, then the total cost will be $105 billion. That’s still a long way from $124 billion for the over 2.395 S&Ls that failed over 15years. And after adjusting for inflation the cost is far less catastrophic then the S&L debacle.

So, as little Orphan Annie sang in the hit movie musical during the 80's recession,"The Sun is Going To Come Out Tommorrow."

Failed Bank List

FDIC May Need Help

The Official FDIC Statement