Friday, August 5, 2011

This Week in Bank Failures

Banks may have avoided the loss of liquidity that would have accompanied a U.S. government default, but they now have to face the consequences of an austerity budget plan which will mean less income for consumers and businesses to pay to the banks. That is the scenario, of course, that prompted the greater number of bank failures in the last three years, and most banks are in a considerably weaker financial condition than they were in 2005 when the current financial woes struck the banking system. One way or another, the coming weakness in the U.S. economy will have its effect on the banks.

Tonight, the United States was downgraded by Standard & Poors, from AAA to AA-Plus. Downgrades from other ratings agencies are likely to follow. The downgrades will reduce the extent to which banks can own bonds issued by the U.S. government, but only slightly. For example, a bank can no longer responsibly put 100 percent of its short-term investments into Treasury bonds, but few well-managed banks do that anyway. Officially, according to federal banking regulators, there is no change in the status of U.S. government and government-backed securities. However, if the United States is downgraded again next year, that would significantly reduce banks’ holdings of Treasury bonds and force them to look farther afield for liquid assets to hold. A further downgrade is almost certain if the House of Representatives struggles to write a budget, or if tax loopholes that were renewed last December are renewed again.

HSBC may exit the U.S. market substantially intact. In its latest deal, announced Sunday, it is selling 195 branches to First Niagara, including $15 billion in deposits and $3 billion in loans. HSBC in May announced plans to maintain a foothold in the United States for foreign and international customers, while selling the bulk of its U.S. operations, including its $30 billion U.S. credit card unit.

For its part, First Niagara admitted to a touch of unease about the timing of the transaction, the day before a “train wreck” was expected to hit the finances of the U.S. government. But it’s a good deal, the bank believes, and it fits its geographical plans, aside from about 40 of the 195 branches, which it expects to sell. Since 2009, First Niagara has been buying underperforming banks, most notably Harleysville National Bank, and looking for ways to cut costs. First Niagara plans to issue $700 million in stock and $400 million in bonds to cover the full cost of this acquisition and conversion.

Was the U.S. stock market drop on Thursday precipitated by a liquidity crisis in European banking? U.S. stocks fell 5 percent yesterday, with most of the world’s stock exchanges following along today, and some observers believe this decline was related to an emergency liquidation connected to troubled banks in Europe, though there are few specifics to support this theory.

Illinois banking regulators closed a small bank tonight. The bank had two locations operating under the name Bank of Shorewood and one more under the name Bank of Elwood. The failed bank had $104 million in deposits. Heartland Bank and Trust Company is taking over the deposits and purchasing the assets.

A second, larger bank failure took place on the West Coast. Washington state banking regulators closed Bank of Whitman, which had $516 million in deposits at 20 branches across the state. Columbia State Bank is taking over the deposits and purchasing half of the assets. However, it will be operating only 8 of the branches. The other 12 locations will not reopen tomorrow, and there will be long lines at the ATMs at those locations, which will continue to operate only until Sunday.

The failed bank started to record losses in 2007, and lost $25 million in the first half of this year. It also lost two of its top executives, who resigned quietly in January. It had been in business for 34 years.