Friday, October 16, 2009

This Week in Bank Failures

The clock is ticking for business lender CIT Group, which appears likely to go into bankruptcy in a matter of weeks. Many of its small-business and retail borrowers are struggling to make loan payments, and that may make it impossible for CIT to persuade its own creditors that it has a chance of making a profit over the next few years. With so little credibility remaining, it’s not clear that CIT will be in a position to negotiate the form of its bankruptcy in advance.

The early quarterly earnings reports from banks have been encouraging, but have not been strong enough to persuade Wall Street that banks will be able to earn their way out of the various financial holes they are in. There continue to be concerns that banks have not yet recognized many of their losses, particularly in U.S. commercial real estate and Eastern European businesses. The most troubling thing in the earnings reports, though, is a pattern of decline in revenue that suggests that banks are losing their customer base. The available banking business shrinks whenever the economy shrinks, but in addition to this, some customers are finding new ways around the banks.

Credit card results are particularly problematic, and suggest that banks’ strategy of soaking their credit card customers to make up for losses elsewhere has driven away most of the profitable customers. Meanwhile, the largest credit-card banks are suffering unprecedented losses from the credit card customers who remain. This is happening at the same time that increasingly large security breaches threaten to bring down the whole credit card transaction network. The credit crunch that is coming next year as banks and borrowers try to cut their losses could mark the end of the credit card as we know it.

Last Friday night’s eerie silence at the FDIC continued well into the evening tonight. For those who had started to wonder whether the FDIC was still solvent and functional, proof came with the west-coast closing of San Joaquin Bank, a bank with five locations at the southern end of the Central Valley of California, four in Bakersfield and one in Delano.

The $631 million in deposits and $775 million in assets are being purchased by Citizens Business Bank, a regional bank operating in the southern half of California. Citizens Business Bank previously had only one location in Bakersfield.

San Joaquin Bank tried to reassure depositors after missing a deadline yesterday to raise capital. That deadline followed a series of regulatory actions dating back almost a year. Regulators in May had prompted the bank to reexamine its books, and in doing so it found it had lost $18 million in the first quarter of this year, four times as much as it had initially thought. In recent weeks, the bank reshuffled its board of directors and tried to finalize deals it said it had worked out with new investors. The closing will cost the FDIC an estimated $103 million.