The survivors on Wall Street may be profitable again, but the crisis in the US banking sector grinds on. So far this year 84 American banks have gone under, more than in the past 16 years combined.
According to the Federal Deposit Insurance Corporation, which insures bank deposits, there are now 416 “problem” banks – that’s 5% of US financial institutions.
Most of the smaller banks that have gone under have done so “the old-fashioned way”, as Floyd Norris puts it in The New York Times. Instead of snapping up complicated toxic securities, they simply saw loans go bad “in volumes they never thought possible” amid an unexpectedly deep recession and due to careless lending standards. Temecula Valley bank of California, for instance, gorged on construction loans that went sour and wiped out its capital.
But some banks, lured by the promise of high yields, snapped up pools of mortgages from some of America’s worst lenders, as Robin Sidel points out in The Wall Street Journal. Guaranty Financial Group of Texas was floored by an investment portfolio full of dodgy mortgages in “foreclosure-wracked California”.
Many small banks, already struggling amid record mortgage delinquency rates and credit-card losses, will now be finished off by their investments.
On that note, the spotlight is now falling on the rapidly deteriorating commercial property market, where 22% of America’s total $3.4trn of commercial property debt has been packaged up and sold on.
With plenty of pain ahead, America’s lending squeeze is set to hamper growth for some time to come.