Bank Failure Friday is in full swing. Tonight there were 5 more failures, numbers 73 through 77 on the year. In the biggest failure since WaMu, BB&T Takes Over Colonial.



Colonial BancGroup Inc., the Alabama lender facing a criminal probe, had its banking operations closed by regulators and taken over by BB&T Corp. in the biggest bank failure since Washington Mutual Inc. collapsed last year.



Branches and deposits of Colonial, Alabama’s second-largest bank, were turned over to Winston-Salem, North Carolina-based BB&T in a deal brokered by the Federal Deposit Insurance Corp., the regulator said today. The failure of Montgomery-based Colonial followed a Florida expansion that saddled the lender with more than $1.7 billion in soured real-estate loans.



Colonial’s failure will deplete the FDIC’s deposit insurance fund by $2.8 billion, the agency said. The fund, which the agency uses to pay customers of a failed bank for deposit losses up to a $250,000 limit and is generated by fees paid by banks, stood at $13 billion at the end of the first quarter, according to the FDIC. The agency has set aside an additional $25 billion for bank failures, agency spokesman David Barr said.

Is There Any Money Left In The Fund?

As late as in the end of April just before the release of the bank stress tests, Ms. Bair Chairman of the FDIC said they would not need any additional bailouts from the U.S Treasury within the immediate future according to The Bulletin. After three new bank failures last Friday, the FDIC’s Deposit Insurance Fund (DIF) diminished by another $185 million for a total remaining balance of $648.1 million.



Below is a graph showing the DIF capital as a percentage of total bank deposits insured by the FDIC. Note that this graph is based on the old insurance limit with a maximum coverage of $100.000/account. This limit has been changed to cover up to $250.000/account until January 1st 2014. Estimates say that the change increases the deposits covered under FDIC insurance to approximately $6 trillion in total.



FDIC Reserve Ratios & Insured Deposits







click on chart for sharper image



The current reserve ratio of 0.014%1 strongly indicates how bad this crisis has affected U.S financial institutions. However, this is not the entire story. If we take a closer look at non-current loans and charge-offs from banks one realizes that the FDIC still has a lot of work to be done. Combined non-current loans and charge-offs amounted to nearly $100 billion in Q109 compared to $15 billion/quarter pre-crisis. Moreover, according to analysts at the Royal Bank of Canada the U.S still has banking failures in the thousands to face before the crisis is over. In turn that should result in the FDIC requesting the pre-approved funding signed by the Congress in May 2009, including $100 billion from the U.S Treasury Department.

Tonight's Bank Failures

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $6.8 million.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $2.8 billion.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $61 million.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $25.5 million.

The cost to the FDIC's Deposit Insurance Fund is estimated to be $781.5 million.

Taxpayers Bailout FDIC

The real total cost for Q1 09 turned out to be almost twice the amount of the estimates. If that will be even close to reality for Q2 09 the FDIC’s DIF will (very) soon be out of funds completely. [Mish: as of tonight the DIF is bankrupt.]



We believe the main reason for this observation lies in a de facto relaxation of accounting standards, even before the FASB 157 amendment on March 15th earlier this year. Basically the relaxation allows banks to only write-off parts of their losses due to market impairment and they may themselves decide a fair price that the asset could have been sold for during normal market conditions to keep in their books. Allowing banks to control how they mark-to-market their assets, will likely backfire and when they ultimately end up failing, imply greater closure costs for the FDIC. From the graph [below] one can infer that the average yearly DIF costs/bank assets have increased at an alarming rate to almost reach 31% in 2008 and 2009.



Yearly Average DIF Costs / Bank Assets







click on chart for sharper image



So, what does that imply? Basically it means that when valuating any U.S bank, their assets should probably be marked down significantly relative to their book value, much because of how they nowadays are allowed to manipulate their balance sheets in order to appear more solvent than they in fact are.

The Moral Hazard of FDIC Insurance

The Seen and the Unseen

Total Up The Unseen

Looming taxpayer bailouts of the FDIC

Taxpayer bailouts of failed banks

Taxpayer bailouts of mortgage reductions to keep people in their homes

Rising property taxes because of increased speculation

The FDIC's role in the housing boom and bust

Fraud costs

Investigatory costs

Stock market crash

Cost to pension plans dumb enough to buy debt in failed banks simply because they were "growing"

FDIC Is Asinine Model

seemed

In fact, losses from today's failures are lower than had been projected.