The Great Banking Consolidation

Over $600 billion in assets have been transferred from, FDIC declared, failed banks in the US since 2008. This of course does not include major consolidations like:

• Bank of America acquires Countrywide Financial in an all stock purchase
• Bank of America's acquisition of Merrill Lynch
  
• Freddie Mac and Fannie Mae being placed in government conservatorship by the Federal Housing Finance Agency
• Lehman Brothers assets purchased by Barclays and Nomura Holdings
  
• Wells Fargo's acquisition of Wachovia
• The Capital Purchase Program (now The Capital Assistance Program) Quarterly Analysis of Institutions in the Capital Purchase Program 2009 Q4
  
• Citi bailouts totaling more than the company's value.
• US Treasury and FDIC engaging in a loss sharing program of $118 billion with BOA
  

Below is a chart (click on picture to expand) of the total commercial bank loans and leases as provided by the Federal Reserve Bank of St. Louis. The federal stimulus has provided liquidity and seems to have leveled off, leaving two options: continue to stimulate the economy or contract further towards pre-2008 crash levels. Below the TOTLL chart is a hyper-link to the St' Louis Fed and the chart for total loans and leases of commercial banks year over year change.



Federal Reserve Bank of St. Louis

A grand consolidation continues in the financial sector as 4 more banks failed on May 7th along with 3 recent failures in Puerto Rico. Referring to the Puerto Rican commercial failures, Sheila Bair, head of the FDIC said:

"The consolidation that is being announced today I think will strengthen the banking sector here."

Bair said the failures will cost the FDIC's insurance fund about $5.3 billion.

Source

• First Pacific Bank of California's accounts have been transferred to City National Bank in Los Angeles.
• Towne Bank of Arizona's accounts have been transferred to Commerce Bank of Arizona in Tucson.
• Access Bank's accounts have been transfered to PrinsBank in Prinsburg, MN.
• The Bank of Bonifay's accounts have been transferred to First Federal Bank of Florida in Lake City.
• R-G Premier Bank's assets have been acquired by Scotiabank de Puerto Rico
• Eurobank's assets have been acquired by Oriental Bank and Trust
  

• Westernbank's assets have been acquired, in part, by Banco Popular de Puerto Rico (around $9 billion)

US bank failures were up from 25, in 2008, to 140 by the end of 2009, a 560% increase. So far in 2010 we have had 68 bank failures and at that rate we would see over 155 failures by 2011. From 2000-2007 there were 27 failed banks.

The trend seems likely to continue as the number of troubled banks is not public but easily visible through the Texas Ratio and other indicators (exp. Tier 1 leverage ratio, NPA/Assets, Equity/Assets, total risk based ratio). The Texas Ratio is basically a measure of bad loans and assets (delinquent or non-preforming) divided by capital. This ratio is a strong indicator of a bank's risk. The list of US troubled banks may not be public, but you can see many are teetering on the edge.

A list of all US banks, their assets and Texas Ratio.






The sub prime wave has past, now we have a mass of Option ARMs and Alt-A loans resetting and the majority of these loans adjust all the way into 2012. The debt backed securities, that are derivatives of these loans, are valued at unreasonable levels on the balance sheets of the banks who hold them, but appear weak and risky to the market, Moody's recently downgraded 312 tranches issued by Bank of America.

As of today there have been over 850,000 foreclosures and 1.4 million bankruptcies, year to date, in the US. Unfortunately almost all of this debt is guaranteed in someway by the taxpayer. Government-related entities backed 96.5% of all home loans during the first quarter, up from 90% in 2009, according to Inside Mortgage Finance. A growning number of homeowners, commercial real estate developers and speculators will be defaulting in this climate, even absent an increase in interest rates. Though an interest rate hike will be necessary as we move forward, it will be painful and will certainly exacerbate the banks' troubles in the long run. In the face on this massive amount of leverage the Chairman of the Federal Reserve, Ben Bernanke has even suggested that these fractional reserve banks may not need a reserve requirement at all... that's right, no-reserve banking. Below is from Bernanke's testimony before the Financial Services Committee.

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system

I expect over 140 US bank failures this year and over 300 more from 2011 to 2012. There is no US economic recovery on the horizon for over 30 months that will not be the product of an even greater historical quantitative easing than 2008 to present.