1. Candidate no.: 934
Student no.: C1126236
America’s failing Banks.
(The evolution of the economic crisis in the West)
By Hazween Syarina Md Hassan
“It’s not just bankers and traders, Dick. Clients are pulling their money. There’s going
to be a run on the bank.”
Andrew Sorkin wasn’t imagining this when he wrote ‘Too Big to Fail’. His words may
be dramatic, but the former Lehman Brothers’ Head of Investment Banking, Skip
McGee did warn his CEO. It was a concern nevertheless Dick was meaning to
address. But it was too late. His bank went bust, one of the many that did in the
height of the 2008 bank crisis.
Dick is in fact Richard Fuld, once chairman of what used to be the largest investment
bank in America. But that was nearly four years ago. Today in America, banks still go
bust. These banks, though without big headlines and popular culture, are mostly
smaller, community banks. This year, 90 banks have so far made it on the Federal
Deposit Insurance Corporation’s (FDIC) failed banks list1
. The rate however seems
to be slowing down. It is a positive fall this year at least, compared to last year’s 138
banks. It looks like the banking sector is picking up momentum. But only just.
Reports from trade journal, Euromoney Trading Limited2
suggest that troubled banks
still make up 12% of America’s total and it is likely that more banks will be forced to
close their doors amid the slow economic progress. Acquisition they added is
unlikely as many foreign and mid-sized banks are pulling away- in spite of discounts
and FDIC guarantees. The FDIC even expects at least 20% from their latest 884
1
FDIC Failed banks list. Retrieved from http://www.fdic.gov/bank/individual/failed/banklist.html
2
Trade journal. Euromoney Trading Limited. June 2011.
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2. Candidate no.: 934
Student no.: C1126236
‘problem banks’ list to end up failing by the end of the fiscal year- 20% of which are
community banks. It is grim forecasting but it was only perhaps that few ever did
know about the fate community banks were destined for since the beginning of the
crisis.
Frank De Lisi3
, a principal consultant at Bank Experts Group says banks traditionally
fail because of large loan exposures, on top of which, they have inadequate
management to be able to manage those exposures appropriately. Much of it too, he
adds, is driven by the need for earnings so as to report greater earnings. Given an
8:1 ratio of debt to capital, the inadequacy of capital to support the bank going
forward is due to such a sensitive position of loans making up much of its assets.
These failures, Mr. De Lisi says are in spite standard examination techniques
practised by the 3 US principle regulators, such as the controller of the currency,
FDIC and The Federal Reserve. Many of these banks do not have the wherewithal to
manage problem assets.
Finance and Economics Professor, Kul Luintel4
of Cardiff University’s Business
School thinks that these smaller, regional banks might be failing because of a
number of factors.
“First, in the slow economy, there is little economic activity. As a result, banks are
nervous to lend even when there is a demand for credit. These banks are still very
conservative and they do not trust the federal bank for cash.”
3
Frank A. De Lisi, Bank Experts Group (US). Interviewed on 6 Dec 2011 via telephone from Cardiff to Massachusetts (US).
4
Kul Luintel, Professor of Finance and Economics, Cardiff University. Interviewed on 29 Nov 2011 at Aberconway Building,
Cardiff.
2

3. Candidate no.: 934
Student no.: C1126236
Prof. Luintel explains that the market in interbank lending provides overnight
borrowing for these banks to balance out their day to day transactions. Fewer
interbank lending makes it difficult for banks to raise money just to keep them going.
Another is due to low capital base. Although there are growing discussions to
increase the capital base in America’s banks, it is still costly. Therefore, with the cost
of funding, fewer lending and a complete absence of positive expectation from the
banking industry and the economy in general, these institutions are in trouble.
Perhaps, if the economy was in better shape, Prof. Luintel suggests that the failure
rate would go down significantly which more importantly, would push expectations
further.
While banks haven’t been making the most of it, credit unions have certainly taken
off. Unlike commercial banks, credit unions operate as cooperative financial
institutions. They are owned by its members and are not profit based5
. Turning to
credit unions has become a trend for so many in the US in the wake of the banking
crisis. National bank transfer day6
is the movement part of a consumer activism. It
was an initiative calling for a voluntary switch from commercial banks to credit unions
by early November, previously. There were claims that over 4 million accounts have
been moved away from the nation’s largest Wall Street banks since its campaign a
year and half ago. Figures have varied and many may argue the reported success of
the movement.
5
‘Credit union difference’. Retrieved from http://www.cuna.org/gov_affairs/legislative/cu_difference.html
6
Bank Transfer Day’. Retrieved from http://moveyourmoneyproject.org
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4. Candidate no.: 934
Student no.: C1126236
Kelly Winter7
, a former Bank of America account holder, was happy to have gone on
a bank run and switched to a local credit union. She was adamant on how big banks
were all about making money by adding fees to their basic services.
“I feel that small movements such as National bank transfer day are truly the only
way to hold the big banks responsible for the crisis. It’s to message that taxpayers
like me do not support their increase in wealth at our expense.”
Regardless however, Mr. De Lisi highlights that these ‘bank runs’ have had little to
do with much of the failures.
“It is an issue of the quality of the loan portfolio that applies largely to community
banks.”
He states that it drives the survival or failure of these banks. The legal lending limit
on banks is 15% of its bank capital structure. In the case of smaller community
banks, a loan of that size generally represents 2 years worth of earnings.
“To take in excess of even 3 or 4 of those types of loans, it will be devastating to go
to loss. Even more so is the impact it will have against the capital.”
But how does it get better from here on out? Not least with the current euro crisis.
Threats to the potential break-up of the euro were imminent and remain still. It took
on from the 2007 meltdown that led to the sovereign debt crises in Europe.
Borrowing costs had gone up as a result from a decline in credit-worthiness of most
Western countries. European economies had begun failing. Ireland, Spain, Portugal,
Greece and Italy are in urgent need of aid to help manage their debts. According to
7
Kelly Winter (US), former Bank of America account holder. Interviewed on 11 Nov 2011 via email.
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5. Candidate no.: 934
Student no.: C1126236
Fitch Ratings8
, if these failures go beyond these most troubled areas, then US banks
face a ‘serious risk’ that their creditworthiness will deteriorate.
The risk for now is somewhat still contained. The exposures of US lenders to major
European banks are much bigger in the continent’s larger countries rather than the
stressed markets in Europe. But Fitch Ratings has indeed indicated that a ‘further
contagion poses a ‘serious risk’. This, after the reports were released from the New
York and London based ratings firm, would concern many of the larger banks.
Stocks at Goldman Sachs, JP Morgan and Bank of America plummeted almost
immediately.
On the contrary, Steven Fried9
, a consultant at Capital Finance believes that these
threats were just speculated.
“Even if there are threats, they are minimal. Unlike the regulators in the US who have
access to information to examine the situation, Fitch Ratings is not intimately familiar
with the exact composition of US banks’ balance sheets. The larger banks, at least,
are so well capitalized and very liquid to give in to any of these threats.”
He believes that the banks are headed for a much better economic climate than
before partially due to the recovering economy, as well as having addressed the
problems that they had from the crisis.
“In the case of the community banks, it is a matter of surviving by not making any
more mistakes and resolving those they made before.” adds Mr. Fried.
8
Fitch Ratings 'U.S. Banks - European Exposure'. Retrieved from
http://www.fitchratings.com/web/en/dynamic/articles/Eurozone-Contagion-Poses-Threat-to-U.S.-Bank-Rating-Outlook.jsp
9
Steven I. Fried, Capital Finance (Commercial Finance and Finance Concern, US). Interviewed on 14 Dec 2011 via telephone
from Cardiff to California (US).
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6. Candidate no.: 934
Student no.: C1126236
For now, US banks are working on building cash reserves, says Akos Valentinyi10
,
an Economics Professor at Cardiff University. Due to their largely uncertain
prospectus in Europe, US banks have been more cautious overall to continue
lending to European banks. Of course, by way of less uncertainty, then lending shall
increase.
There is still however, a seismic risk to much of what US banks are exposed to
already from Europe. Heavy doubts cloud over their future, with riding concerns from
Europe to cause another possible, worse crisis. Mr. Fried expresses that it is
imperative that Europe resolves their problems in a reasonably short term- as short
as within the next 6 months or so.
“This and absenting any catastrophic event in this period should not present any
problems to US banks. Therefore, unless this happens, things might look to worsen
and hit that turning point and it is not too long of a way ahead either; if Europe does
not recover soon.”
10
Akos Valentinyi, Professor of Economics, Cardiff university. Interviewed on 5 Dec 2011.
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7. Candidate no.: 934
Student no.: C1126236
For now, US banks are working on building cash reserves, says Akos Valentinyi10
,
an Economics Professor at Cardiff University. Due to their largely uncertain
prospectus in Europe, US banks have been more cautious overall to continue
lending to European banks. Of course, by way of less uncertainty, then lending shall
increase.
There is still however, a seismic risk to much of what US banks are exposed to
already from Europe. Heavy doubts cloud over their future, with riding concerns from
Europe to cause another possible, worse crisis. Mr. Fried expresses that it is
imperative that Europe resolves their problems in a reasonably short term- as short
as within the next 6 months or so.
“This and absenting any catastrophic event in this period should not present any
problems to US banks. Therefore, unless this happens, things might look to worsen
and hit that turning point and it is not too long of a way ahead either; if Europe does
not recover soon.”
10
Akos Valentinyi, Professor of Economics, Cardiff university. Interviewed on 5 Dec 2011.
6