Friday, May 18, 2012

This Week in Bank Failures

Politicians usually won’t talk about bank runs, but there is no obscuring this week’s bank run in Greece. President Karolos Papoulias had to say something about the banks, and described the mood of depositors as “great fear that could develop into panic.” And it is not just Greece that is affected. Depositors, especially businesses, have been drawing down their accounts in Belgium, France, Spain, and Italy also this week. Despite public worries about a panic, this slow-motion bank run will almost surely be self-limiting, as business managers feel calmer with smaller balances at risk. The movement of deposits is so slow partly because the more nervous depositors have long since moved their less active deposits to the United Kingdom, Scandinavia, Switzerland, and (ironically) Iceland, along with other countries seen as financially safer. The main risk to the banks comes from the possibility of unexpected, alarming news from Athens or other European capitals that causes depositor opinions to change quickly.

A week after trying to obscure the scale of banks’ losses by exempting most loans from reporting requirements, Spain has appointed an independent authority to estimate the value of banks’ loan portfolios.

JPMorgan CEO Jamie Dimon has agreed to testify before Congress in the middle of June. Members of the Senate Banking Committee will surely ask questions about how the bank lost billions of dollars in a badly structured hedging strategy. Estimates of the bank’s losses from that trading strategy have risen to $3 billion. The original estimate, a week ago, was $2 billion. The losses, large as they are, are still not enough to negate JPMorgan’s expected trading profit during the current quarter. Observers in derivatives markets say someone, apparently JPMorgan, was issuing excessive volumes of some derivatives. The volumes were far greater than the market would support, so the bank was effectively selling the derivatives at a 20 to 30 percent loss. In derivatives trading, it is not surprising to see someone create a derivative and sell it at a loss, but what traders do not understand is why anyone would continue to do so in large volume for an extended period, as JPMorgan apparently did between last year and last week. This would explain why JPMorgan cannot fix the size of its losses, as it would have to wait for the derivatives to run off. The bank itself has not commented on any of this speculation.

Bank failures resumed tonight after a week off. The OCC closed Alabama Trust Bank, a small-town bank in Sylacauga, Alabama. Southern States Bank is taking over the deposits and purchasing the assets.

Wisconsin regulators closed Wausau Postal Employees Credit Union, which had 845 members. Member share accounts were transferred to CoVantage Credit Union.