Friday, July 10, 2015

This Week in Bank Failures

It was back to the drawing board for Greece and European authorities after voters in Greece soundly rejected an IMF austerity plan in a referendum on Sunday. The new plan proposed by Greece last night was not so different as you might expect, but importantly, it does not lean so heavily on selling public property to foreign investors. The plan has received mostly favorable reviews so far and could be approved as early as Sunday. Caution is in order, however, as some of the same officials who need to approve the new plan proposed a similar plan last month only to disown it two days later, setting up the referendum in Greece. During the delay, a humanitarian crisis has erupted in Greece, with food aid coming in from three continents to feed families left hungry in a country nearly depleted of cash. Greece will need to issue a quasi-currency soon, but the government has carefully avoided mention of that in the last few days as it pushes to negotiate a three-year bailout extension this weekend.

There are varying estimates of how depleted Greek banks are. One analysis ended up concluding that depositors had already withdrawn virtually all their deposits from the largest banks in Greece, but that seems unlikely. The situation will improve in some ways when the banks eventually reopen. Then exporters will be receive payments for their last two weeks of exports, and that will enable them to pay their workers and suppliers.

Europe clearly miscalculated in withdrawing its last plan for Greece last month. The agreement they are likely to end up approving this weekend is better, to be sure, but the improvements are tiny compared to the decline in value the euro has suffered and the damage to the eurozone’s reputation. These are costs that will be felt across the eurozone and so far show no signs of being easily reversed.

If the problems in Greece fade from view a few weeks from now, it will be because of the slow-motion crash underway in China, particularly in that country’s stock market. China has taken increasingly desperate measures to prop up its stock market this month, but nothing worked until Thursday when authorities imposed a six-month ban on selling stocks for large holders who own more than 5 percent of a company. With no sellers, obviously prices stopped going down, but at the same time, it is no longer really a market if you can buy but you can’t sell. Investors and funds whose accounts are frozen for six months while the market continues downward will have a hard time convincing themselves to ever buy stocks in China again. Freezing out the large investors also makes it difficult to conduct an IPO, so that the dozens of recently canceled IPOs might never go forward. Yet the government has no good options. A full-on stock market crash in China would weaken the government‘s authority and could even lead to regime change. At the same time, an enormous amount of bank-supplied funds, said to be over 1 trillion dollars, is in play in the Chinese stock market, so that the continued decline of stocks could eventually lead to bank failures on a scale the country has never seen.

There was a bank failure in Denver tonight, with state regulators closing Premier Bank. It had $30 million in deposits. The bank had been in financial distress for eight years after a period of making too many business startup loans. It closed its headquarters four years ago as a cost-cutting measure. An attempt to recapitalize the bank last year fell short. United Fidelity Bank is assuming the deposits and purchasing the assets.

In Pennsylvania, a credit union failed tonight. The NCUA liquidated Trailblazer Federal Credit Union in Washington County, transferring member accounts to Chrome Federal Credit Union. The failed credit union had more than 1,000 members.