Even as the economy shows signs of slowing down, the banking industry remains ever so in a critical condition. If current numbers are any indication, the banking industry is set to experience more number of bank closures this year than the previous year.
The Federal Deposit Insurance Corp. (FDIC) reported 96 closures as of end of last week whereas last year the total number of bank closures at this time of the year was 70. Last year the FDIC had reported a total of 140 bank closures.
This week itself, the FDIC reported six bank closings. Mainstreet Savings Bank, FSB, Hastings, Michigan was the recent closure directed by the Office of Thrift Supervision, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Commercial Bank, Alma, Michigan, to assume all of the deposits of Mainstreet Savings Bank, FSB.
The health of the banking industry vis a vis the economy might not be as bad as the numbers reveal. That is so since banking closures are a lagging indicator, as per independent banking analyst Bert Ely. Put another way, banks are still facing the consequences of bad loans and the mortgage crisis even though the economy has assumed a slow recovery. “There are still a lot of problems in the banking system,” Ely says.
However he is optimistic about a recovery and projects that closures while peaking this year will begin to recede in the coming year. This prediction is also substantiated by reports coming from the FDIC. It reports that the banking industry logged the highest first-quarter profit since 2008. Banks netted $18 billion in profit for the first quarter this year, an impressive $12 billion improvement over the same period last year. These gains are attributed to banks steadily building capital to improve balance sheets, including attracting outside investors.
A hint of good news comes from the FDIC’s Deposit Insurance Fund balance which has improved slightly from the last quarter of 2009, sitting at negative $20.7 billion at the end of the first quarter.
But it would seem that the industry has a long way to go before it is out of the mess it found itself as a result of the 2008 financial meltdown. The FDIC lists 775 banks as “problem” institutions which are defined as banks that may be in jeopardy of failing. Prior to the housing crisis, this list of “problem” institutions was a mere 48 in 2006. Even though most problem banks don’t eventually end up shutting down, the comparatively higher number signals the current state of the banking industry and points to the risk of more failures in the coming days.
The Federal Deposit Insurance Corporation was created by the Congress in 1933 to restore public confidence in the nation’s banking system. The FDIC insures deposits in US banks and savings associations and ensures the health of these institutions through a process of risk assessment and management pertaining to the risk exposures of these institutions.
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