Small banks fail at growing rate, straining FDIC
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A year after the federal government rescued the banks considered too big to fail, the ones deemed too small to save are approaching a grim milestone: the 100th bank failure of 2009.
In what has become a ritual, the Federal Deposit Insurance Corp. has swooped down on a handful of troubled lenders almost every Friday, seizing 98 since January alone and putting their assets into the hands of another bank. By comparison, there were just 25 bank failures in 2008, and just 10 in the five previous years.
While the parade of failures still represents a mere fraction of America's small banks, it underscores a growing divide between them and large institutions like Goldman Sachs, JPMorgan Chase and U.S. Bancorp, which are slowly growing stronger as the economy improves.
The troubles for many small banks are just beginning. Many analysts say bad commercial real estate loans could sink hundreds of small banks over the next few years and place a significant drag on the economy.
Already, the bank failures straining the FDIC and its fund, which keeps depositors whole. Flush with more than $50 billion only two years ago, the fund recently fell into the red.
The prospect of more failures has led the FDIC to seek new ways to replenish the fund with higher and earlier payments by healthy banks, even after setting aside reserves for future losses.
The initial wave of failures has also unsettled some communities, even though most of the troubled institutions have been bought by other banks rather than shuttered. While deposits are safe thanks to federal insurance, the new buyers often do not have the same ties to local businesses as the former owners.
In some cases, they tighten lending and make it harder for longtime customers to obtain loans or obtain them on favorable terms. In other cases, managers of the new bank may end offers for high-interest certificates of deposit and calling in certain lines of credit.
First Published October 11, 2009 12:00 am
