The assets held by the 80 failed banks presently amount to $413.8 billion. In addition, the International Monetary Fund (IMF) projects that writedowns of assets originated in the United States will amount to $2.7 trillion, most of which will be borne by financial institutions. As a result, dozens of additional banks could fail over the next 12-18 months.
A closer look at the failed institutions on the FDIC’s failed bank list reveals:
• The majority of failed banks are small- or medium-sized institutions holding assets of less than $1 billion.
• A disproportionate share of the failed banks is clustered in states in which the real estate market has suffered price declines of 40% or more or in states adjacent to those having such markets.
Size of Failed Banks: In the macroeconomic environment following the collapse of the nation’s housing bubble, which commenced during Summer 2006, 80 banks have failed to date.
If one defines a small bank as having less than $100 million in assets, a medium-sized bank as having $100 million to $999.9 million in assets, a large bank as holding $1 billion to $9.9 billion in assets, and a very large bank as having $10 billion or more in assets, one finds that small- or medium-sized banks account for 80% of failures to date. 60% of failed banks have been medium-sized financial institutions.
The median figure for assets held by the failed banks is presently $295 million. The smallest failed bank was Metropolitan Savings Bank with $15.8 million in assets. The largest was Washington Mutual Bank with $307 billion in assets.
Geographic Concentration of Failed Banks: Bank failure has clustered in a small number of states. Three states—California, Georgia, and Illinois—account for almost 50% of bank failures to date. Five states—California, Florida, Georgia, Illinois, and Nevada account for just over 60% of bank failures to date.
Through July 2, 23 states (46%) had one or more bank failures, while 27 (54%) had yet to record a bank failure. However, extraordinary federal assistance to such giant banks as Citibank and Bank of America, among others, may have limited a more widespread incidence of bank failures.
Data from the S&P/Case-Shiller Home Price Indices reveal that the clustering of failed banks has generally occurred in states with real estate markets that have experienced especially sharp price declines or adjacent states. Through April 2009, the seasonally-adjusted Case-Shiller 10-City Index has fallen 33.1% and the broader 20-City Index has declined by 32.0%. In a number of markets, real estate prices have fallen more than 40% from their peak. Select market date relevant to the five states that have seen a disproportionate incidence of bank failures follows:
Atlanta: 21.5%
Chicago: 26.8%
Detroit: 44.4%
Las Vegas: 51.8%
Los Angeles: 40.9%
Miami: 47.8%
San Diego: 42.2%
San Francisco: 45.6%
Tampa: 40.9%
The Georgia cluster may largely be the result of the decline in key sectors of Florida’s real estate market. Moreover, Georgia’s banks may have been hit harder than Florida’s on account of their persistently thinner cash holdings. The FDIC’s latest data showed that on March 31, 2009, cash accounted for 6.0% of assets in Florida’s banks and 4.5% of assets in Georgia’s banks. A year earlier, those figures were 3.3% and 2.4% respectively. Excessive derivatives exposures very likely contributed. In terms of a share of assets, Georgia's banks had more than 100 times the derivative exposure of Florida's financial institutions in both March 2008 and March 2009. In fact, in the March 2009 data, the derivatives positions held by Georgia's banks came to 106% of their assets.
The Illinois cluster of bank failures may be resulting from a combination of a weak, but not severely depressed, real estate market in Chicago and the severe manufacturing dislocations that are ongoing in the Great Lakes region. Reflecting the severity of the problems plaguing the region's manufacturing sector, the mean unemployment rate for Illinois, Indiana, Michigan, and Ohio was 11.4% in May. Nonetheless, Michigan has experienced far fewer bank failures than Illinois. Derivatives exposure may explain the difference. As a share of assets, Illinois banks had 3.7 times the derivative exposure as their Michigan counterparts in March 2008. In the most recent FDIC data, Illinois banks still had double the derivative exposure as Michigan's banks.
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