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 On a weekend where
no banks failed, the Financial Times and The Wall Street Journal are sure shaking things up by announcing the results of their own stress tests, estimating that the capital of 500 to 600 banks could shrink to worrisome levels and essentially causing those institutions to be seized by the Federal Deposit Insurance Corp. The Financial Times reported Monday that U.S. small and medium-sized banks have to raise $24 billion in capital and as many as 500 banks could close based on research done by Sandler O'Neill + Partners LP. The firm, which used the standards set by the government's stress tests of the larger banks, determined that 38% of 200 banks in the tier below the top 19 banks in the nation were short on capital. Not to be outdone, The Wall Street Journal used the same stress tests guidelines to report Tuesday that commercial real estate loans could generate losses of $100 billion to $200 billion by 2010 at over 900 small and midsize U.S. banks. The conclusion of the report was: "Under that scenario, more than 600 small and midsize banks could see their capital shrink to levels that usually are considered worrisome by federal regulators. The potential losses could exceed revenue over that period at nearly all the banks analyzed by the Journal. The potential losses on commercial real estate are by far the largest problem facing the midsize and small banks, easily exceeding losses on home loans, which could total about $49 billion, according to the Journal's analysis." Even though the government is not extending the stress tests to small and regional banks, it is doling out $25 billion or so returned TARP funds to such banks, so chances are eventually the government could conduct stress tests on smaller banks going forward. Robert Albertson, chief strategist at Sandler O'Neill, told The FT: "This will ultimately migrate down the banking industry no matter what Treasury says. It's like telling bank examiners to close their eyes and not to think of a chicken." Say what? A "chicken," eh? Commercial loans will cause losses at banks, and mind you, 33 banks have failed so far this year. But the FDIC has only put 252 banks on its "problem list" and has estimated bank failures will cost it $65 billion through 2013. According to the Journal story, the Fed estimates "total losses at the 940 banks could hit $92 billion through 2010, and only 185 banks would see their capital levels dip into risky territory." Many analysts don't believe that closings of this recession will compete with the 1,256 closings between 1985 and 1992 including Richard Bove, banking analyst at Rochdale Securities LLC, who told CNBC that around 150 banks would fail this year. So, 500 to 600 bank closures could be overshooting it, just a bit. Naked Capitalism seems to agree that the Financial Times report is a bit dire and most likely inaccurate: "The logic is spurious. The smaller banks, with perhaps a handful of exceptions among the biggest of the rest, are of a size with makes it possible to do a reasonably detailed exam. There is no reason for a cookie cutter approach like the stress test. There is no particular reason to believe the stress tests will be extended to other banks, particularly since we are likely to be on to a new plan in six to nine months anyhow." As the FT and Journal reports touch on, many smaller banks are already seeking ways to raise capital or applying for TARP, which will help them recover from commercial losses, but may not be enough to put all of the banks in the clear. Ultimately the FT report does suggest those banks that don't cut it will most likely have to merge. However, if banks are merging, they probably are not failing, which is a good thing, but brings us to another dilemma. Is bank consolidation a good thing or a bad thing? As we've seen with Citigroup Inc. (NYSE:C) and Bank of America Corp. (NYSE:BAC) the financial supermarket model is passe and bigger is not always better. Of course that is up for debate as The Deal magazine's article "Big, bigger and too big" points out: "There's little agreement now about where the sector will end up. The harshest critics insist the industry must get smaller, both by size of the biggest banks and investment firms, and as a component of the overall economy. Others counter that giant financial conglomerates are inevitable byproducts of a global economy." And this could lead us down the road of too many TBTF banking institutions, as The Deal's editor in chief Robert Teitelman pointed out earlier this month. In fact, as Teitelman notes too, many of those banks that are troubled and on the FDIC's warning list such as BankUnited have already been told to merge with other banks or find private investors, so TBTF may be the future of the banking industry, especially if 500 banks really do fail. - Maria Woehr
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