Bank Failures – Peak Stress Not Yet Reached

Monday, August 24, 2009

Executive Summary

• Guaranty Bank failed on Friday and was sold to a foreign bank.
• Bank assets are undeniably under stress and are deteriorating.
• Given the current trajectories, as many as two thousand more banks may fail.
• The FDIC absolutely must remain well capitalized with liquid cash, or confidence-destroying bank runs will result.
• It was premature of Bernanke to declare victory.
• Choose your bank wisely.

One to two thousand bank failures are on the way. Peak stress has not yet been reached. Nearly every major source of bank loan stress continues to worsen. We’ve not seen any signs of a bottom yet in the most important measures.
 
The key risk here that a gap could develop between the FDIC’s ability to make good on depositor accounts and demand for funds from those accounts.
 
While this stress was significant enough last fall to cause me to issue warnings about keeping some money out of the bank and seeking to move funds from less to more sound institutions, I held back those recommendations once I judged that the risk had passed.
 
But now that risk has returned.

It will be no surprise to anyone here that on Friday, Guaranty Bank of Texas became the third-largest bank failure of 2009 and the eleventh-largest of all time.

It is interesting to note that the purchaser was not a US bank, but a Spanish bank, making this the first time in history that a non-US bank has bought a failed US bank. Also, the FDIC has estimated that this endeavor will cost it $3 billion, yet it has agreed to share losses on an astounding 91% of the remaining assets that are to be taken over by the Spanish bank.

Third largest bank failure of 2009 announced

NEW YORK (CNNMoney.com) — Guaranty Bank was closed by federal regulators Friday in the third largest bank failure this year bringing the total number of failures to 81 in 2009.

The Federal Deposit Insurance Corporation was named receiver of the Austin, TX-based thrift, which had approximately $13 billion in assets and $12 billion in deposits as of June.

BBVA Compass, a U.S.