This Friday we have seen another collapse in the banking system, with another 7 banks having to be closed down in the United States. The figure 7 is not the real issue, it’s the fact that 106 banks have had to be closed down this year, costing the FDIC $ 25 billion. The list of the FDIC seems to keep on rising; at the moment 416 institutes are on the problem list, which is nearly double what it was at the beginning of the year. Evidently we have not been told the whole truth since the start, as I doubt so many banks suddenly had bad assets, what else don’t we know and how dark will the future be? Although there are some signs of recovery and the newspapers play up every spark of it, there are obviously still many issues that need to be taken care of.
The causes for the bank failures are said to be due to the decline in commercial property loans. Small banks were hit especially badly by this, as while larger institutions received government aid, smaller banks were often set aside. However, many of these small banks made risky loans as well during the boom years and are having to suffer and face the consequences now as the recession drags on. Also the rise in job losses is increasing people’s need for loans to cover the dry spell, yet banks are trying to weather the storm of bad loans and are decreasing their leading.
According to analysts of Bloomberg and Reuters, the number of bank closing should and would be higher if the FDIC fund wasn’t depleted, as closing down a bank nearly costs 30% of the failed banks assets. In addition since George W. Bush (typical Bush move) thought it best to shrink the agency’s workforce, they no longer have the necessary resources (human capital) available. However, in order to avoid panic and hysteria, the FDIC sees it as best not to give full details of how deep the hole of its deposit insurance fund actually is.
The FDIC is trying to obtain a greater cash flow in order to shorten the list of the problem instructions. They have proposed that healthy banks pay three years of advance deposit insurance fees, which would help them raise $45 billion and fill up that insurance fund again. Is this the right way, asking for so much in such a time might send even more banks onto the problem list.
On the one side we should just leave nature take its course and have the banks fail, but that would create chaos and we certainly do not need more of that at the moment. So we should structure the closing down of banks, but is government interference really the best way. I personally do not believe so, as you say in German, it is introducing Lucifer to the Devil. Once the state has control, it does not give it back. Generations before us have tried to fight it and we are undoing their deeds by giving the power back to the government. However, the question remains, how else can one solve the problem, in a world which has become so hysteric, which takes decisions impulsively more often then really thinking them through.
Reading the different newspaper coverage on this topic was rather interesting this week. I thought I would have a look at what the American papers right and what more international papers had to say. I looked at the Austin Business Journal, which doesn’t even feature the story, which I thought was rather odd, considering the impact of the story. However, other American papers such as CNN gave a very detailed report of what happened on Friday and which banks exactly were involved, but they did not offer much insight into the future or the past, but at least they gave some reasoning for the occurrences.
As always I red my Swiss newspaper, NZZ, the article was very short this time just like the BBC article. To my astonishment they literally copy pasted and translated word for word two paragraphs from the Washington Post article, doesn’t seem like they had much indicative to really do some background search. It was otherwise informative and kept to a minimum. The Washington Post article was trying to give a little bit of information, so that people would more or less be aware of what is happening and what it to be expected however, every other paragraph would be a reassuring one, they are probably tying to condense the panic.
My favourite article was the Bloomberg one, it had everything in it. What happened, what led to it, what can we expect for the future, how has it affected the people who work for the banks etc… it was an easy read, good for those who already have prior knowledge and perfect for those who are a little lost on the topic. I also enjoyed the fact that the article was sincere, it said that more problems were to be expected, what the truth looks like more or less with the FDIC. It was a very well research article and I would recommend that whoever is interested by this topic should read it. Reuters and the International Herald Tribune articles were very similar to the Bloomberg one, as the International Herald Tribune was solely based on the Reuters article and their facts. There was however one discrepancy it seems, as Bloomberg suggested that in 1992, 179 banks had to be closed and Reuters information says that it was 181, I do not know which of both is correct, but I was “astonished” to find this in two such renowned newspapers.
For my introductory question, I do not have the answer I guess we will have to wait and see.
Till next week.
Sources used:
NZZ
In den USA gehen immer mehr Banken pleite
24.10.09
http://www.nzz.ch/nachrichten/wirtschaft/aktuell/banken_pleiten_usa_einlagensicherungsfonds_fdic_1.3917431.html
Bloomberg
U.S. Bank Failures Exceed 100 for Year, First Time Since 1992
24.10.09
http://www.bloomberg.com/apps/news?pid=20601103&sid=a464OcFDguyw
Reuters
UPDATE 2-U.S. bank failures pass 100 mark for 2009
24.10.09
http://uk.reuters.com/article/idUKN2312835020091024?pageNumber=2&virtualBrandChannel=0&sp=true
Washington Post
Bank failures hit 106 for year; many more are weak
24.10.09
http://www.washingtonpost.com/wp-dyn/content/article/2009/10/24/AR2009102400301.html
Austin business journal
http://austin.bizjournals.com/austin/latestnews.html
No entry of this pretty vital news
BBC News
US bank failures top 100 for year
24.10.09
http://news.bbc.co.uk/1/hi/business/8323565.stm
CNN Money.com
23.10.09
Bank failures stack up: Now 106 for 2009
http://money.cnn.com/2009/10/23/news/economy/bank_failure/index.htm
International Herald Tribune
U.S. Bank Failures Pass 100 For 2009
23.10.09
http://www.nytimes.com/reuters/2009/10/23/business/business-uk-banks-failures.html?_r=1&scp=1&sq=us%20bank%20failure&st=cse
Good. 7/10
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