Banks still failing

The largest number of bank failures in nearly 20 years has eliminated jobs, accelerated a drought in lending and left the industry’s survivors with more power to squeeze customers.

279 banks have collapsed since Sept. 25, 2008, when Washington Mutual Inc. became the biggest bank failure on record. That dwarfed the 1984 demise of Continental Illinois, which had only one-seventh of WaMu’s assets. The failures of the past two years shattered the pace of the prior six-year period, when only three dozen banks died.

Two more banks went down last Friday, and failures are expected to “persist for some time,” according to a report issued Tuesday by Standard & Poor’s. In the second quarter of this year, the Federal Deposit Insurance Corp. increased its number of problem banks by 6% to 829.

Between failures and consolidation, the number of U.S. banks could fall to 5,000 over the next decade from the current 7,932, according to the top executive of investment-banking firm Keefe, Bruyette & Woods Inc.

The upside of failures is that they can represent a healthy cleansing of a sector that grew too fast, with bank assets more than doubling to $13.8 trillion in the decade that ended in 2008. Many banks that failed were opportunistic latecomers. Of the failed banks since February 2007, 75 were formed after 1999, according to SNL Financial.

Still, economists say, the contraction represents an enduring threat to capital, lending and the economy.

Problem bank list grows

The government’s list of troubled banks hit its highest level since 1993 during the second quarter, although the pace of growth continued to slow. The number of banks at risk of failing rose by 53 to 829, the Federal Deposit Insurance Corp. said. That increase marks the smallest rise since the first quarter of 2009.

While some choose to look at the optimistically, let’s look at it realistically. The number still increased. If we want to be optimistic, let’s wait until the number is not growing at all. After that, we can start hoping for a decline.

The number is almost twice the 415 banks on the FDIC’s watch list a year ago. On average, 13% of banks on the FDIC’s problem list have been seized and shuttered by regulators.

So far this year, 118 banks have failed, with 45 closings during the last quarter.

Banks and institutions insure by the FDIC earned approximately $21.6 billion during the quarter, the highest in three years.

Know Your Finance Reform: Bank Reserves

Bank Reserve

Big banks have to reserve as much money as small banks do to protect against future losses. But big banks have to replace hybrid forms of capital called trust preferred securities with common stock or other securities. Banks with under $15 billion in assets don’t have to replace those securities, but can not add more to their reserve funds.

Seven European banks fail stress test

Seven European banks would not be strong enough to withstand another recession. They would face a capital shortfall of 3.5 billion euros ($4.5 billion).Tests were run in an attempt to revive investor confidence showed on Friday, but have obviously not succeeded.

Five of Spain’s smaller regional lenders, known as cajas, failed the test and their recapitalization is likely to speed a restructuring of the troubled sector.

Banks in Germany and Greece were also seen as weak spots and in need of restructuring, but state-owned Hypo Real Estate was the only German lender to flunk and state-controlled ATEbank was the only Greek bank to fail.

No big banks failed the test.

Europe tested how 91 banks would cope with another recession and losses on government debt after the Greek crisis hit markets and raised fears the euro zone could unravel.

It aimed to repeat a health check on U.S. banks last year that helped restore investor confidence and underpinned a recovery by bank shares.

Well, see you next year?

Morgan Stanley turns profit

Morgan Stanley saw a stronger profit than expected in three months. The bank reported a $1.4 billion profit against the $138 million loss last year. Shares are up 2.7%. The results represent a significant victory for the firm. Morgan Stanley has reportedly been bulking up the trading division this year, adding several hundred more employees.

On the other hand, Goldman Sachs disappointed investors after reporting a sharp fall in profits after being hit by the UK’s bonus tax, a US fine and poor trading. Bank of America also seems to be struggling.

Morgan Stanley said employee compensation for the quarter – which included the bonus pool – was $3.9 billion. But it said it had set aside $361 million to cover the cost of a one-off tax on bonuses paid to UK employees.

Meanwhile, another Wall Street stalwart, Wells Fargo, reported its quarterly net profit fell slightly to $3.1bn from $3.2bn a year earlier.

Stocks rally Tuesday

The long holiday weekend has breathed life into the stock market. Stocks have rallied on Tuesday. Investors went after shares hit when indexes down over 15% over the past two months.

Both the Dow and Nasdaq closed at an eight month low on Friday. The Dow Jones was up by 140 points or 1.5%. The Nasdaq composite was up 38 points, about 1.9%.

Gains were broad based, with 29 of 30 Dow shares rising, led by Caterpillar, Chevron, Hewlett-Packard, IBM, Microsoft, JPMorgan Chase, 3M and Wal-Mart Stores.

Progress from banks are helping to drive the recovery. Bank of America was up 2.5% and the KBW bank index was up 2.6%.

Home repossession hits record high

In April, banks took control of 92,432 properties which is up 1% from March. The number is up 45% from last year. While the number of repossessions rose, the number of new notices declined.

California, Michigan, Florida, Illinois, and Nevada were the worst affected. Those five states accounted for 52% of the repossessions in April. The worst affected urban area was Las Vegas. One in every 60 homes received a repossession notice.

The National Association of Realtors said that house prices rose in nearly 60% of US cities in the first quarter.

Though April was a grim month, banks are hoping the number will fall in May.