Nearly 100 bailed-out banks may collapse all the same
December 27th, 2010
More collapsing banks could mean more 'too big to fail' banks
The $700-billion bank bailout, launched in the final months of the Bush administration, was meant to save US financial institutions from a systemic collapse. But an analysis of banks' earnings statements concludes that nearly 100 bailed-out banks are at risk of collapsing all the same.
Despite receiving a total of $4.2 billion in bailout cash, 98 US banks are at risk of failing, the Wall Street Journal reports.
The banks are suffering from “eroding capital levels, a pileup of bad loans and warnings from regulators,” the Journal reports, and the nature of the problem indicates that these banks were in trouble before the 2008 crisis hit -- a sign that the US's regulatory structure for banks may have been insufficient for years or decades before the collapse.
So far, seven bailed-out banks have already collapsed, costing taxpayers $2.7 billion.
December 27th, 2010
More collapsing banks could mean more 'too big to fail' banks
The $700-billion bank bailout, launched in the final months of the Bush administration, was meant to save US financial institutions from a systemic collapse. But an analysis of banks' earnings statements concludes that nearly 100 bailed-out banks are at risk of collapsing all the same.
Despite receiving a total of $4.2 billion in bailout cash, 98 US banks are at risk of failing, the Wall Street Journal reports.
The banks are suffering from “eroding capital levels, a pileup of bad loans and warnings from regulators,” the Journal reports, and the nature of the problem indicates that these banks were in trouble before the 2008 crisis hit -- a sign that the US's regulatory structure for banks may have been insufficient for years or decades before the collapse.
So far, seven bailed-out banks have already collapsed, costing taxpayers $2.7 billion.
Chris Cole of the Independent Community Bankers of America argued to the Journal that the smaller banks at risk of collapse didn't have access to all the same financial instruments that the larger banks had.
For example, the Federal Reserve ran an emergency liquidity program for the large Wall Street banks, giving them short-term loans to keep them stable. Last fall, after pressure from Congress, the Fed released the names of the recipients of $3.3 trillion in emergency aid. Among them were Bank of America and Wells Fargo, as well as a number of foreign banks, including Switzerland's UBS and France's Societe Generale.
But smaller, regional US banks did not have access to this program, and relied on the $700-billion TARP program passed by Congress. That program was never meant to help out banks that were in trouble prior to the crisis -- but as the Journal's analysis shows, many of these banks may have been "in parlous shape from the beginning."
In all, the Journal analysis found that more than 10 percent of the US's 7,760 banks are in financial trouble. Should more banks fail, it will likely result in greater concentration of banking in the hands of fewer banks. Many economists have argued that the creation of "too big to fail" banks through mergers poses a serious hazard for the economy, as these banks can feel comfortable taking on unnecessary risk, knowing they can count on a taxpayer bailout if they fail.
Because many of the larger banks are now in good health and have been able to repay bailout funds, the TARP program may itself not turn out to be as large a burden on taxpayers as once feared. According to the New York Times, the program -- which ended this fall -- could end up costing "a fraction" of the original cost, "and could conceivably earn taxpayers a profit."
But it may not rescue many of today's ailing banks. Arthur Wilmarth, a banking and law expert at George Washington University, told the Journal that many of these banks are saddled with commercial real estate loans that will never pay off.
"A lot of them are in kind of a frozen position," he said.
For example, the Federal Reserve ran an emergency liquidity program for the large Wall Street banks, giving them short-term loans to keep them stable. Last fall, after pressure from Congress, the Fed released the names of the recipients of $3.3 trillion in emergency aid. Among them were Bank of America and Wells Fargo, as well as a number of foreign banks, including Switzerland's UBS and France's Societe Generale.
But smaller, regional US banks did not have access to this program, and relied on the $700-billion TARP program passed by Congress. That program was never meant to help out banks that were in trouble prior to the crisis -- but as the Journal's analysis shows, many of these banks may have been "in parlous shape from the beginning."
In all, the Journal analysis found that more than 10 percent of the US's 7,760 banks are in financial trouble. Should more banks fail, it will likely result in greater concentration of banking in the hands of fewer banks. Many economists have argued that the creation of "too big to fail" banks through mergers poses a serious hazard for the economy, as these banks can feel comfortable taking on unnecessary risk, knowing they can count on a taxpayer bailout if they fail.
Because many of the larger banks are now in good health and have been able to repay bailout funds, the TARP program may itself not turn out to be as large a burden on taxpayers as once feared. According to the New York Times, the program -- which ended this fall -- could end up costing "a fraction" of the original cost, "and could conceivably earn taxpayers a profit."
But it may not rescue many of today's ailing banks. Arthur Wilmarth, a banking and law expert at George Washington University, told the Journal that many of these banks are saddled with commercial real estate loans that will never pay off.
"A lot of them are in kind of a frozen position," he said.
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