Friday, October 1, 2010

This Week in Bank Failures

Ireland is reshuffling its budget after committing to a €30 billion bailout of Anglo Irish bank. A recent downgrade is also adding to the country’s budget stress.

Most of the largest banks will meet the new capital requirements not by raising new capital, but by shrinking their loan portfolios — and they might shrink by more than that. As the role of banks changes, from the world’s biggest risk-takers to risk-averse continuing institutions, the opportunities available to them will shrink accordingly. Some analysts this week were speculating that the largest banks worldwide would have to cut their operations by a third or more, in addition to the roughly 5 percent cutbacks that have taken place already.

Some banks, however, will suspend dividends to raise capital, and UBS announced a three-year suspension of dividends this week. Switzerland-based UBS is affected more by the reclassification of assets than most banks. UBS will also have to reduce its high-risk loans from €400 billion to €300 billion over the same period, it said. It shouldn’t have any trouble doing so.

U.S. banking regulators have issued final rules, to go into effect January 1, that especially affect credit-card securitizations. The expanded safe-harbor provisions should ensure that no U.S. credit card issuer has to abruptly shut down on that date, but the total size of new credit card debt, incurred after January 1, will surely have to shrink under the new rules.

According to two measures released this week, the quality of credit has improved this year. This indicates that tighter lending rules put in place last year at virtually all banks have had the desired effect of reducing the banks’ exposure to loan losses.

The hope that an increase in short sales would lead to a decline in home foreclosures hasn’t materialized, at least not yet. Short sales have expanded, to be sure, but foreclosures are still increasing.

The first bank closing tonight was Wakulla Bank, closed by Florida banking regulators. The failed bank had $386 million in deposits and 12 locations in the Florida panhandle. It had been operating since 1974, expanding steadily until last year. Deposits have been transferred to Centennial Bank, which is also purchasing the assets.

Wakulla Bank’s liquidity faded as its capital was increasingly tied up in foreclosed real estate, including a golf course that it ended up operating.

On the West Coast, bank regulators in Washington closed Shoreline Bank, which had $100 million in deposits and three locations in Shoreline, Washington, a suburb north of Seattle. The deposits have been transferred to Los Angeles-based GBC International Bank (formerly Guaranty Bank of California), which is also buying 63 percent of the assets.

Shoreline Bank lost money on loans for local commercial real estate projects. It also took its share of losses in residential real estate. It had been in business for 11 years. In May, regulators ordered it to raise capital immediately, but it was unable to do so.