Wednesday, June 03, 2009

Still trust your bank? Maybe you shouldn't.

Bank failures accelerating with no end in sight, and we're liable to be stuck with the bill, too.

Yahoo Financial News
FDIC Fund Running Dry
Dirk van Dijk, CFA
On Wednesday May 27, 2009, 2:22 pm EDT

As the FDIC has had to step in to take over more and more insolvent banks, the fund has dwindled to dangerously low levels. At the same time, the number of problem banks continues to grow at a rapid pace...

...By all rights, the assessments on the banks should be raised to make up for the shortfall in the FDIC, but now is not exactly the time to do it, since it would simply deplete their capital at a time when they desperately need to improve their capital base.

To bring the fund up to a more normal 1.2% of insured assets would require $44.8 billion, not counting the losses that the fund has incurred so far in the second quarter, or any subsequent losses. That would be a pretty hefty tax for the banks to pay. Still, fairness demands that it be paid by the banks, not by the general taxpayer.




...It is very likely that the list of problem banks and their assets will continue to grow. When looking at the second graph (from the FDIC, by way of http://www.calculatedriskblog.com/) note that the difference between the last bar and the second to last bar is only a quarter, while the other bars are annual differences. Thus the increase in the assets of problem banks is actually accelerating by increasing $60.6 billion in the first quarter, almost twice the $34.3 billion average increase per quarter during 2008.

Similarly, the quarterly increase in the number of problem institutions, 53, is significantly higher than the average quarterly increase during 2008, which was 44. In short, we still have many significant problems in the banking system, and the rate of increase shows no sign of slowing down...




In other words, if this were a line graph instead of a bar graph, it would show a parabolic swing upward at the current end - and look really scary, which is why they didn't plot the graph that way. We all know what a parabolic increase means - a crash is coming. Real life can't absorb an exponential increase in liabilities.

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