Friday, August 21, 2015

This Week in Bank Failures

With Greece’s bailout renewal secured, its prime minister is stepping down and calling new elections. It is a necessary step to hold the country together as it faces a changed agenda and a fractured political landscape, but it is also perilous, with the government still facing a crisis and less able to respond during the two months of political maneuvering.

I have been skeptical about the decline in oil prices because of the high cost of extraction, but there are indications of technical improvements in the last two or three years that are bringing costs of extraction down for many existing oilfields (drilling and fracturing aside). With U.S. oil prices down 50 percent from last year, dozens of energy companies in bankruptcy, and oil towns turned to ghost towns, there is some concern about whether a few banks might be at risk from this downturn. Banks could take losses not just from loans for energy extraction but also in real estate in formerly booming areas.

The stock market decline in China continues, with stocks losing 12 percent this week on new signs of weak manufacturing, along with worries over disruptions caused by a major industrial disaster in Tianjin. Stocks are down 30 percent from their peak. Banks will take substantial losses on stock market loans when individual stocks decline more than 50 percent. Banks also face collateral liquidity concerns with so many stocks frozen. It is expected that the central bank will ensure liquidity for banks with incidental losses on stock market loans, but will not attempt to save lenders that made stock market loans their core business.

Cecil Bank in northeastern Maryland is up for sale after receiving a prompt corrective action order from the Fed. The bank must do what it can to raise capital or find a buyer, officially within 90 days, but in practice, within a matter of months. A prompt corrective action order also bans dividends, restricts bonuses, and limits the interest rates the bank can pay on new accounts to prevailing market rates. The bank has $300 million in assets and 9 locations. Its financial condition has been in decline for at least five years.

The U.K.’s Co-op Bank reported a first-half loss of £204 million and says losses will continue for two more years before it can return to profit. Regulators last week waived a £120 million fine for prior sloppy technical operations. The fine would have put the bank close to insolvency, and the responsible executives had already been replaced. The bank has closed a third of its branches in the last year in a cost-cutting move, and the cost of branch closings is part of the explanation for its losses.

In a series of class-action settlements, U.S. retailer Target will reimburse cardholders for a tiny part of the inconvenience resulting from the mass leak of personal data from the store network in November and December 2013. Each cardholder affected will receive about $1.14.