Regulatory Reality

Sep 16 2009   9:02PM GMT

Can the economy rebound without the banks?



Posted by: David Schneier
Tags:
Audit
bank
compliance
credit
GLBA
NCUA
real estate
Regulatory Compliance

I had one of those odd moments yesterday regarding the banking industry that I wanted to share with you.

On the homepage of a major news website were two headline stories. The first was about how Ben Bernanke believes the recession we’re in is coming to an end. Immediately to the left of the story was the following headline: “Don’t be surprised to see more banks failures.” I don’t know if the site editors were funnin’ with us or just simply didn’t realize the irony in how they stacked the items, but it certainly caught my eye.

How can the recession be ending while more banks are expected to fail?

I’m not an economist but I’m reasonably certain I don’t need to be in order to grasp the financial fundamentals of the situation. If the banking crisis is far from over, if there are still significant cash shortfalls that need to be flushed out of the banking system, how can we begin a recovery? And as if though the contradicting stories weren’t enough to make me rush to my digital soapbox, there was another headline a short while ago that read “Banks’ commercial real estate exposure probed” with the subhead, “Delinquency rates on commercial loans have doubled in the past year.”

More bank failures expected, commercial real estate portfolios tanking at an accelerating rate….. sure sounds like we’ve turned the corner to me, wouldn’t you agree?

I’m onsite at clients all of the time and one of my favorite pastimes is to spend time with the people who pretty much run their institutions be it from the front or backseat position and get their take on both the banking industry and state of the economy. These are the people who understand how a fractional increase in an interest rate can make or break an institution and see in the dense pile of numbers a pattern that must be very much like tea leaves. They know what they know and don’t much care for the headlines or industry pundits who tell us what to think. And so I look to them for guidance on what to expect and gauge where we are based on what they see.

They’re still freaked out.

One recent conversation was a mini-dissertation on the looming collapse of the commercial real estate market. There are empty storefronts everywhere you look and even emptier office buildings. How many construction sites sit idle with partially constructed buildings waiting for an infusion of cash to get them finished? What happens to the banks that provided the loans for these empty or incomplete structures? You now hold paper on structures that are worth much, much less than what you estimated and there’s no market to sell that paper or move those properties. What do you do next?

Another conversation was with someone who is about as expert as you get on residential real estate and they shared their opinion that the worst is far from over. Too many saturated markets have failed to yield sufficient reductions to bring things back into alignment and that needs to happen before the healing can begin. That means there are more foreclosures looming on the horizon, which will only grease the slippery slope the banking industry is currently on. And when you factor in that President Obama has said there will not be anymore bailout activities beyond what’s already been made available you have to assume that we’re in for even more tough times ahead.

Again, I’m no economist but I get to shoot the breeze with some fairly bright bulbs and they’re not lining up behind Mr. Bernanke.

I’ll admit that I’m ready to see the light at the end of the recession tunnel. I’m ready to stop reading about bank failures and predicting how many more are going to fail (is that even newsworthy anymore?) and start reading about how the industry is going to be regulated in the future to prevent this from happening again. Because the real story to me is that over a year has passed since this financial free-fall first started and nothing has changed to keep it from happening again.

I suppose you can say I’m looking for closure of a different variety.

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  • Makking
    Martin, At the risk of sounding self-serving I'd suggest you check out my most recent post (09/30) regarding the FDIC. While the DIF is certainly running low it's far from overdrawn. The FDIC will manage through these very challenging times because it's well managed and operates with a very clear, very simple charter that they have never deviated from during it's many years of existence. I worry that this crisis can reoccur without regulatory reform. I worry that the economy will take a decade or more to fully rebound. I worry that more banks will fail, some much larger than what we've grown accustomed to. However I never worry about my deposited money, ever!
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