Saturday, January 24, 2015

This Week in Bank Failures

Several of the headlines this week reminded us of the immense financial scale of the banking sector. I’ll start at the low end, which in banking is millions, and move up. Wells Fargo is paying $35 million in penalties for improperly steering mortgage applicants to a title company in exchange for bribes and kickbacks. The bank somehow failed to discover the corruption in its ranks even after Federal regulators told it the specifics of their investigation. Two other banks were also involved with this scheme, but one will pay a much smaller penalty because of its quicker response, and the other will not pay penalties because it discovered and resolved its problems without the assistance of regulators. The size of Wells Fargo’s penalty is larger than some entire banks, but Wells Fargo is so large that this incident does not even count as an embarrassment. It will be no more than a footnote in its quarterly statement.

Moving up into the billions, JPMorgan Chase is stuck with a $1.5 billion loss that results from an “clerical” error (but don’t blame the clerks, this mistake was made by bank executives and corporate attorneys) in an earlier court filing, which released the bank’s security interest in one more asset than intended. An appeals court this week said it could not simply overturn an incorrectly filed document when there are other parties involved.

Next, a trillion, which can be found at two places in Europe. A stopgap bank bailout in Russia is valued at 1.5 trillion rubles, which with the decline of the ruble last year is the equivalent of just $25 billion. Two thirds of the funding will be provided by a program announced today by the Finance Ministry, with the rest to come from private investors. The deposit insurance fund will provide a small amount of additional assistance to systemically important banks, apparently in the form of bond repos.

The European Central Bank plans to purchase €1 trillion in bonds and other assets to support the economy of the euro zone. This will make a slight difference in the broader economy, but the effect will be felt most immediately in the banks. The asset purchases and reduced interest rates will take much of the financial pressure away from Europe’s many troubled banks.

There is only one area of the financial sector where we can meaningfully talk about quadrillions. We were reminded this week that the shadow banking system is larger than ever, especially in the United States, Europe, and China. By some estimates it has grown twice as large as it was during the collapse of 2007–2009 — and at that point, it was already a multiple of the size of the legitimate banking system. The scale of the shadow banking system is indicative of how top-heavy the financial sector is, and that tells you how easily a change in relative asset values could lead to systemic upheaval and collapse.

There was a bank failure tonight, the second of the year. State regulators closed Highland Community Bank, a small bank with two locations in Chicago. Its $54 million in deposits were transferred to United Fidelity Bank, which is also purchasing the assets of the failed bank. Highland Community Bank’s capital dwindled from $25 million to nothing over the last two years. A deal to recapitalize the bank fell through in July.