The first story in the Sunday New York Times was the bank failure story. The story was accurate enough in a narrow factual sense, but misleading in its use of context. The misdirection starts with the first word of the headline:
Small Banks Fail at Growing Rate, Straining FDIC
There is no factual reason for the inclusion of the word “small.” It is true that most bank failures are small, simply because most banks are small, but large banks are also failing, and it is the large bank failures, not the small ones, that create the financial strain on the FDIC. Some of the largest bank failures in history have occurred since last year. These few large bank failures have sapped the FDIC’s reserves far more than all the small bank failures combined.
I have to imagine that the Times added the misleading word “small” to the headline (and within the story) just to make the situation seem more like an academic concern than the economic threat that it is. “Banks Fail” would be more accurate, but readers might find that thought too alarming.
The story emphasizes the losses from real estate development loans, and that has been key in the list of bank failures so far. Yet the greater concern looking forward focuses on commercial real estate, with loans funding not just new building projects, but also acquisitions. The confusion between real estate development and commercial real estate is common because they overlap and because of the confusing way the terms are used in the worlds of banking and real estate, yet you get a clearer picture if you make the distinction between the two categories.
The prediction of “1,000 small bank failures” is probably overdone. It helps to recall that it was just one year ago that experts were predicting a total of 200 from this recession. At the same time, it misses the larger picture. While every bank failure comes at a cost to customers and the community, the greater concern is about the large, perhaps record-setting bank failures that may occur, similar to the ones that have occurred already. No one should imagine that the remaining large banks, including the 19 banking giants tagged as too big to fail by the U.S. Treasury, are now protected from the economic forces that affect the rest of the economy. The Treasury may be determined to keep the largest banks going, but it does not have a magic wand that can undo the tragic business decisions that have put most of these banking giants at risk. The failure of any one of the 19 largest banks in the United States would be an event large enough to cast the current run of bank failures in a very different light.
These quibbles aside, though, it is a hopeful sign that the United States’ most prominent newspaper has given, on one day, its most prominent story position to the troubles in banking. This kind of spotlight may lead, eventually, to the long overdue reforms that could still prevent a few of the failures of the next few years and, more importantly, could limit the scope of economic damage from future bank failure episodes.