Friday, December 28, 2012

This Week in Bank Failures

In 2012 U.S. bank failures slowed down and made a decided move to the eastern half of the country. Most of this year’s 51 bank failures occurred in Georgia, Florida, Illinois, Minnesota, Missouri, and Tennessee. Even in these states bank failures came at a slower pace than in prior years. But by contrast, there was only one bank failure west of the Rockies this year. Aside from Missouri, bank failures in the western half of the United States have virtually come to a stop.

The leading cause of bank failure in 2012 continued to be commercial real estate development projects on the edges of metro areas. Despite all the talk about banking crime, it wasn’t more of a factor in bank failures than in the three previous years.

Changes are in store for 2013. Most notably, emergency deposit insurance, after being extended several times, is finally expiring now. The main implication of this is that payroll accounts will no longer be insured. This usually won’t affect workers who get paid by direct deposit, but those who take paychecks to the bank on Friday might find that the checks have bounced after the bank they were drawn on fails on a Friday night. The loss ultimately falls on the employer, and it is a risk that could lead employers to move payroll accounts to other banks, or even multiple banks, to get the maximum benefit of deposit insurance. If employers get worried about the financial condition of a bank and pull their payroll money out, the deposit flight would tend to accelerate the failure of that bank. Employers who worried could move paychecks from Thursday night to Wednesday or Tuesday to reduce the amount lost in bank failures, which usually occur on Friday night, or they might encourage more employees to sign up for direct deposit.

Also as 2013 starts, we can keep an eye on the previously scheduled federal budget cuts. These translate into 2 million direct job losses, similar in scale to federal government layoffs in 1981 that led to a prolonged recession. Among other adjustments, the Treasury may no longer be guaranteeing some bonds for local governments and institutions participating in federal programs. This change, to the extent that it takes place, will affect the creditworthiness of some borrowers, weakening the risked-based capital position of many banks. All this could change if Congress acts, but those expecting the House to agree on a budget plan have been disappointed before.