More News on the Troubled Banking System: The TARP Report

Reports concerning the banking system keep popping up from time-to-time that continue to cause us to pause and wonder about the financial health of the banking system. 

We do not get information directly from the Federal Reserve System or the Federal Deposit Insurance Corporation about the state of commercial banks. 

However, we see that the Federal Reserve has pumped over $1.5 trillion in excess reserves into the banking system.  The Fed tells us that the quantitative easy that has created these excess reserves is to help spur on economic growth.  Yet, there still lingers a doubt about the real financial condition of the banking system and about the possibility that the Fed is keeping the banking system excessively liquid so as to keep banks, especially the smaller ones, afloat so that the FDIC can either close the weaker ones or assist others to merge into healthier banks in a smooth and orderly fashion. 

The FDIC, at last count, still had well over 800 commercial banks on its problem bank list.  So far this year the FDIC has closed about one bank per week.  The information we don’t have is the number of banks that have been merged out of existence this year.  Last year about five banks left the banking system every week either through being closed or by being merged out of existence. 

Now, Christy Romero, special inspector general for the Troubled Asset Relief Program (TARP), has released information indicating that “351 small banks with some $15 billion in outstanding TARP loans face a ‘significant challenge’ in raising new funds to repay the government.” (http://professional.wsj.com/article/SB10001424052702303978104577364262736412398.html?mod=ITP_moneyandinvesting_0&mg=reno64-sec-wsj)

This information was released in connection with her quarterly report to Congress. 

The total of $15 billion is not a small number.  If one looks at the FDIC statistics, as of December 31, 2011, there were 5,776 commercial banks that had assets of $1.0 billion or less.  The total of 351 banks only represents about six percent of the commercial banks of this size, but the $15 billion debt to TARP is approximately 12 percent of the Total Equity Capital of these banks. 

Why did these commercial banks need so much TARP money?  Well, the TARP money was supposed to provide liquidity relief to these organizations so that they would not have to get rid of underwater assets that would threaten their solvency.  They needed the TARP money because so many commercial banks had become “liability management” banks using purchased funds to support their asset portfolios. 

The only commercial banks that used to be “liability management” banks were the larger banks that could go into the money markets and purchase funds at market rates.  The larger banks purchased monies through the market for negotiable certificates of deposit and the Eurodollar market and similar other “liquid” markets.

Over the past twenty years or so almost all commercial banks, even some very small ones became “liability managers” as they used different forms of purchased funds to allow them to bid more aggressively for riskier assets or to grow faster than their local “communities” would allow.  Government agencies, like the Federal Home Banks even encouraged this behavior by making loans available to smaller banks…and thrift banks…so that they could grow and build their asset portfolios. 

I was just amazed this past year.  Given a bank transaction I was involved in I had the opportunity to take a webinar on Asset/Liability management offered by the American Bankers Association.  Within the material presented in this webinar was substantial information on how banks…small and smaller banks…could or should use purchased funds.  Not demand deposits or savings deposits supposedly the bread-and-butter of community banks, but purchased funds from outside the “community.”

Main Street was attempting to play the game like Wall Street!

This plays right into the TARP scenario.  These “smaller” banks were using purchased funds to support assets of different flavors and assortments.  As these assets dropped “underwater” and as the purchased funds had to be rolled-over, the banks, to avoid having to take losses by selling the assets, obtained TARP funds to allow them to keep the assets on their books.

This was exactly the purpose of the government troubled asset program.

Now, here we are a couple of years later.  The assets are apparently still underwater which means that the TARP funds cannot be repaid.  And, the banks are in such bad condition that they cannot even pay the quarterly dividends that are owed to the Treasury. 

According to the Report, in the first quarter of 2012, 200 TARP banks failed to make their latest payment.  The shortfall in dividend payments is $416 million!

So, we have some more evidence that the banking system is not “out-of-the-woods” yet in terms of its solvency issues.  Given this conclusion it is understandable that the Federal Reserve and the FDIC are aiming to err on the side of too much ease and very strict oversight.  One can guess that this posture will not end soon.

Furthermore, the bigger banks are just going to become a larger and larger part of the whole banking system.    

FDIC Statistics: Larger Banks Doing Better Than Others

The FDIC statistics were released this morning.  The larger banks continue to prosper relative to the rest of the industry.  The larger banks in this case are those that are larger than $1.0 billion in asset size. 

For one, over the past year, the number of larger banks in the United States rose by 5 whereas the rest of the commercial banking system shrunk by 245 banks.  Of the total reduction in commercial banks in the United States of 240 in 2011, only 92 banks were closed by the FDIC. The rest were merged into other organizations. 

A total of 185 banks smaller than $100 million in asset size were closed.

At December 31, 2011, the commercial banking system had 62 fewer banks than on September 30, 2011.  Of this number, 66 were smaller than $100 million in assets.  The FDIC closed only 18 banks in the fourth quarter.

In terms of lending, net loans and leases at the largest 514 banks in the country rose by about $194 billion in 2011, with $137 billion of the increase coming in the fourth quarter of the year. 

This increase is coming in the face of an improving loan portfolio.  Noncurrent loans and leases at these larger banks fell by $44 billion over the past year while the loan loss allowance at these banks dropped by $38 billion.

It appears that the largest commercial banks in the country are feeling better about their loan portfolios and are becoming much more aggressive in actually making new loans. 

This is not the case for the other banks.  For banks that hold assets somewhere between $100 million and $1.0 billion, net loans and leases actually declined by about $31 billion in 2011.  For the fourth quarter of the year net loans and leases held about constant. 

For commercial banks with less than $100 million in assets loans declined by about $8 billion for the whole year and by about $3 billion for the fourth quarter of 2011.

In both of these smaller categories both noncurrent loans and leases fell but by relatively small amounts as did the loan loss allowances held by these organizations. 

The list of problem banks dropped in the fourth quarter by 31 banks to 814 commercial banks on December 31, 2011.  This total was down from 884 banks on the problem list on December 31, 2010. 

814 banks on the problem list is still a very large number representing 13 percent of the number of commercial banks insured by the FDIC.  And, this 814 banks does not included other organizations that are still in very deep trouble but do not yet qualify to be placed on the problem bank list.  The number of banks on the problem list and near being on the problem list could total about one-third of the banking system.

And, in the fourth quarter of 2011 we saw that the number of banks in the industry was still dropping at an annual rate of about 250 banks leaving the system every year.  

Bottom line: the banking system is still not very healthy.  Going further I would argue that the smaller banks are especially not “out-of-the-woods” in terms of problems.  The continuing problems being experienced in the housing market and in commercial real estate will weigh heavily on these smaller banks as we go along.  And, don’t expect much lending from them.

The largest 514 commercial banks continue to grow.  In terms of number, commercial banks with more than $1.0 billion in assets represent only about 8 percent of the organizations in the industry.  However, in terms of assets held, these larger banks hold 91 percent of the assets in the commercial banking industry and 89 percent of the loans.  Their bad assets seem to be decreasing as a problem and their loan growth appears to be getting stronger every quarter. 

Everything we see points to the continued demise of the smaller banks in the industry.  And, there appears to be nothing on the horizon to turn this trend around.