The final figures released before Sheila Bair, chairman of the Federal Deposit Insurance Corporation, relinquishes her role in early July point to a slight recovery for the US banking sector. In its first-quarter report released in May, the corporation announced that it expected the FDIC fund, which is used to protect depositors, to be back in the black by the end of June – the first time in seven quarters. At the end of the first quarter the fund had a negative balance of $1 billion, compared with a negative balance of $7.4 billion at the end of 2010.
The bank failure rate also appears to be slowing according to the data. In 2010, 152 banks failed but in the first quarter there were 26 failures, indicating that the peak has passed. The report, which covers 7,574 lenders in the US, also showed that the banking industry posted a $29 billion profit in the first quarter – its best quarterly result since the start of the crisis.
But the problems are far from over despite the fairly positive report. Troubled banks still account for 12% of the nation’s total (rising by four to 888 in the first quarter) and with a lack of economic data pointing to sustained upward momentum it is likely that more banks will be forced to close their doors. House prices continue to fall, which does not bode well for construction loan portfolios. The CoreLogic house-price index, used by the Federal Reserve, showed a one-year decline of 7.5% in house prices in its latest data (year ending end of March 2011). Analysts are predicting further drops in house prices in the US. For example, hedge fund CQS in London is expecting a fall of a further 10% next year. Consumer confidence seemed to be increasing in May but escalating prices of gasoline will have reversed much of that now.
First-quarter data might seem positive but there is still a dark cloud over the US banking industry. And now foreign banks or mid-sized banks seem unlikely to take on failed banks. Discussions around increasing capital requirements for banks with as little as $50 billion of assets are going to stymie acquisitions of failed banks by mid-sized banks (which have been the dominant source of buyers). Which bank with $30 billion would want to take on a $20 billion bank given the increased costs incurred – in spite of discounts and FDIC guarantees? And foreign banks, such as HSBC and RBC, seem to be exiting the US having been bullishly expanding during the crisis. After five years in the role, Bair declined a second term, and she must now be counting her blessings.
