bank

Accountability key to banking recovery

Every day, I receive a semi-deluge of industry related emails.  Between the various agencies, media sites, organizations and associations I tend to receive more communiqués than I know what to do with.  But I developed an interesting habit last year when the banking industry first started its tailspin dive by making certain to read every single issuance from the FDIC.

Going back to at least last September I have read and saved each and every one of them (several hundred I might add).  I’m sure some of my peers will beg to differ, but for me this is where anyone in the industry should’ve been looking during the crisis for the best indicators of what’s going on.

Yesterday, I was glad for this somewhat addictive habit of mine.  For what may be the very first time since Lehman went belly-up, I may have found the first true concrete piece of evidence that we’re on the road to recovery, if only in some small way.

The FDIC agency alert yesterday announced plans to bolster the Deposit Insurance Fund (DIF) by requiring insured institutions (mostly the banks you and I know) to prepay on their quarterly premiums so that the fund remains viable and liquid through the still unfolding resolution of the banking mess.  And that’s significant because unlike a year ago, this time around the plan calls for the industry to take responsibility for itself and not go running to Capitol Hill for help, an option FDIC Chairman Sheila Bair has denounced on several occasions.

Here’s what Bair had to say in the announcement:

“The decision today is really about how and when the industry fulfills its obligation to the insurance fund. It’s clear that the American people would prefer to see an end to policies that look to the federal balance sheet as a remedy for every problem. In choosing this path, it should be clear to the public that the industry will not simply tap the shoulder of the increasingly weary taxpayer. This proposal is a vote of confidence for the banking industry’s resilience, and it will continue to recover its strength as we work through the significant challenges ahead.”

The reason for my optimism is that this action shifts control back to the banking sector to fix its own mess.  It puts greater emphasis on each individual institution to fulfill its obligations to the DIF in advance of using those same funds for more traditional activities commonly associated with generating profits.  I think accountability is necessary, if not essential, to repairing the damage inflicted on the industry and repairing its reputation with depositors, investors and borrowers (something the NCUA had figured out much sooner).  And so I’m feeling a little better about where we’re heading, economically speaking.

Oh, and Comptroller of the Currency John C. Dugan (that’s the OCC head honcho in case you didn’t recognize the handle) agrees with me.  Mr. Dugan said of the FDIC plan: “The actions we are taking today represent a balanced approach to raising needed money for the deposit insurance fund without impairing the ability of our banks and thrifts to support economic recovery.”  He added, “I think this is a very positive proposal. The staff did an excellent job, and I support the way you handled it”.

I’d like to chalk it up to “great minds think alike.”

By the way, if anyone knows of a Sheila Bair Fan Club or is thinking of starting one I’d appreciate if you would let me know.  She won my admiration last year (no surprise to my regular readers) and has routinely found ever more ways to score points with me.  She continues to step up and talk straight, smart and to the point about what’s going on with the banks and what to do about it.  I look forward to the President acting out on the banking reform plans announced earlier this year and I sincerely hope he put Bair in charge of the new entity.

For now, though, I have to go; seven more FDIC email alerts have landed in my inbox and I need to check ‘em out.

Can the economy rebound without the banks?

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.