Regulatory Reality

Jan 17 2011   1:55PM GMT

Is the U.S. banking crisis over?



Posted by: David Schneier
Tags:
bank closing
bank closings
banking
banking crisis
compliance
FDIC
FFIEC
foreclosure
GLBA
NCUA
regulatory
Regulatory Compliance

As my professional mind started winding down this evening in anticipation of the weekend, my thoughts started drifting towards yard work and time with the family. Then my Droid started chirping it’s little sing-song of alerts as a round of emails hit my inbox and I was brought back to reality for a little longer.  It was the usual blast of junk email, some personal correspondence and because it’s Friday evening, a notification or two from the FDIC regarding bank closings.

It started me to thinking about how that sort of thing seems to have tapered off lately. I went back and searched my inbox for all FDIC correspondence over the past three months and I’m fairly confident it revealed a trend that such activities slowed down. Then I remembered a story I read today about how the bigger banks (e.g. Citigroup, Bank of America, etc.) are expecting to restore the issuance of dividends sometime this year for the first time in nearly three years. Fewer bank closures plus healthier balance sheets has to equal the end of the crisis, right? I mean, what other indicators are you going to look for to prove such a theory?  Bigger banks are generating profits, surviving banks are managing to keep their balance sheets sufficiently above water, so now we can all breath a collective sigh of relief, finally.  What a great way to end the week and sail off into a three-day weekend, right?

But then I remembered another story I’ve been tracking, the one about how analysts expect 2011 to set all kinds of ugly records for foreclosures of private residences.  One expert estimated that nationwide 1 in 50 homes will experience some form of foreclosure activity and that 1.2 millions homes will actually be repossessed by the banks.  That’s a lot of housing inventory about to be added back to the books, a bundle of legal expenses about to be incurred and a tremendous hit to any banks balance sheet.  So in addition to not receiving the anticipated revenue from the lost loans, the banks now have to face the harsh reality that much of the real estate coming back onto their books isn’t worth quite what they appraised it for when the loan was issued. It makes me think that while the rate of closings might be slowing, it’s nowhere near the end.  Plus as I’ve shared with you in the past, banking industry insiders that I’ve talked to are firm in their belief that until the commercial real estate market experiences a serious correction, the bleeding can’t end and the healing can’t begin.

If you want to gain a visual understanding of the enormity of the foreclosure crisis beyond just numbers, check out the Google Maps real estate feature which allows you to display foreclosed properties in any view. I played with it a bit and was stunned by how much of just about any geographic area I have connections to was covered in little red dots.  Seriously, seeing it in front of me like that was shocking despite my being intimately aware of the numbers.

So I’m thinking that until the concept of foreclosure returns to its previous status as rare and uncommon, the banking crisis is not quite over. Until the value of a banks portfolio is solid and reliable, the bank itself cannot be.  It’s just plain common sense. I’m no economist and I’m no real estate expert but I can’t figure out how anyone can legitimately declare the crisis over until the underlying cause is satisfactorily addressed. Plus I still know way too many people who are out of work or who are certain they’re about to be; what’s going to happen when they run out of savings?

I want this to be over as much as anyone (probably more considering too many of our clients are still worried on keeping their doors open and not so much on standard compliance issues).  But I’m not going to believe we’ve turned any corner in a meaningful way until those Friday FDIC bank closing emails return to their previous status of being rare and unusual.

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