More bank failures are likely

A year after the financial crisis first stirred comparisons to the Great Depression, the pace of bank failures is rising. But as the annual count heads toward triple digits for the first time since 1992, finance experts warn that the worst may be yet to come, and also that the toll so far belies the magnitude of the crisis.

As of Friday, the Federal Deposit Insurance Corp. had taken over 94 banks in 2009. The failures ranged from the tiny Dwelling House Savings & Loan Association, of Pittsburgh, with $13.4 million in assets, to Colonial BancGroup Inc., of Montgomery, Ala., with $25 billion in assets.

As raw numbers, those pale beside the failures of the Great Depression - especially those that occurred before President Franklin D. Roosevelt signed a law establishing federal deposit insurance as of Jan. 1, 1934. In the previous year, bank runs had been rampant and about 4,000 banks had collapsed.

The numbers also pale beside the failures associated with the savings and loan crisis of the 1980s and '90s. In 1989 alone, 531 banks failed.

But that does not mean the current financial crisis is less severe than the S&L collapse. The opposite is true. Instead, the current crisis' magnitude is masked in the bank-failure data because it was met with a government response also of historic proportions, finance experts say.

"This crisis is very different," said Mark Zandi, chief economist of Moody's Economy.com. "Arguably, if the government hadn't intervened at all, the entire financial system would have frozen, and the banking system would be insolvent."

Last September, after allowing the collapse of Lehman Bros. Holdings Inc., a leading Wall Street investment bank, the administration of former President George W. Bush and the Federal Reserve moved in tandem to limit further shocks by intervening directly and by pushing for creation of the $700 billion Troubled Assets Relief Program.

A key decision was to prevent the failure of other institutions deemed "systemically significant" - or "too big to fail" - because of their deep financial links with other institutions.

By propping up businesses such as Citigroup Inc. and Bank of America Corp., federal officials and taxpayers "helped forestall hundreds of bank failures," Zandi said.

Through that lens, this year's toll of bank failures gains significance, as do those on the horizon.

In an interview last week with CNBC, Sheila Bair, the FDIC chairwoman, said her agency did not make public predictions but that she expected failures to continue "at a pretty good clip this year and next." Anticipating a growing need to step in as a receiver, the FDIC has begun recruiting some of its own retirees.

Zandi said Economy.com's models predicted 400 to 500 more bank failures over the next two to three years, many of them smaller institutions with deep exposure to commercial real estate.

Although the current crisis is often blamed on the collapse of a bubble in housing prices, experts such as Zandi say it is now being fueled by a parallel fall in the value of commercial real estate.

The value of such property is harder to assess because transactions are rarer and recent sales may be happening under distressed conditions. But according to the Moodys/REAL Commercial Property Price Index, which tracks repeat sales, commercial property prices are down nearly 40 percent from their peak two years ago.

"That part of the economy is still in a very deep recession," Zandi said. "It's not recovering; it's still sliding."

FDIC data reflect that market weakness. The largest bank to fail so far this month, Corus Bank of Chicago, which had about $7 billion in assets, was "a major lender to condominium, office, and hotel projects," according to Zacks Investment Research Inc.

It is not clear how many more banks might have failed without the government's intervention. Since October, that has included TARP investments in at least 674 institutions as well as an FDIC guarantee of bank debt. Some have gotten tens of billions of dollars in public support, and others as little as a few hundred thousand.

What is clear is that without that extra support, the FDIC would classify more banks as undercapitalized "problem institutions," a label that, as of June 30, the agency had affixed to 416 institutions out of 8,195 nationwide.

Still, there are remnants of good news for those who are not shareholders in troubled banks.

One is that bank failures tend to be "lagging indicators" of a recession, occurring after distressed borrowers and then their bankers give up hiding problems and hoping for miracles, Swarthmore College economist John Caskey said.

Another is that, thanks to an earlier era's changes, bank collapses are largely invisible to insured depositors.

"You really just notice a change in the name of the bank," Caskey said.