One Thousand U.S. Banks Predicted to Fail

by Michael Lombardi, CFP, MBA

Quietly, without much media coverage, another three U.S. banks failed Friday, bringing the total number of bank failures to 40 for the year.

The most recent casualties were the Southern Community Bank of Georgia, the Cooperative Bank of North Carolina, and the First Nation Bank in Kansas. The 40 bank closures this year are the most since 1993.

According to a startling report from RBC Capital Markets, up to 1,000 U.S. banks could fail in the next to three to five years, while the Federal Deposit Insurance Corporation (FDIC) itself expects bank failures up to 2013 may cost $70.0 billion. In the first quarter of 2009, the FDIC identified 305 “problem” banks.

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As regular readers of my column know, I have been predicting interest rates will be rise in the years ahead, as the government moves from fighting deflation to dealing with a sagging U.S. dollar and rapid inflation. Higher interest rates will place pressure on commercial real estate.

To this end, it is my belief that many U.S. banks could get caught in a classic commercial real estate squeeze. Interest rates could rise to the point where many commercial loans will no longer make sense for the properties or borrowers, causing increased defaults for banks. The RBC Capital Markets report, the one that predicted 1,000 U.S. banks may fail, was also very concerned about bank losses stemming from commercial real estate loans.

Yes, the FDIC insures the deposits of over 8,000 financial institutions. And deposits of up to $250,000 are still insured by the government. So we have a great system in place. But, as a consumer, I don’t want the hassle of my bank deposit being transferred to another bank if my bank fails. Be informed. Especially if you are with a small regional bank, ask to see your bank’s financial statements. There is nothing wrong with being an informed consumer.

Michael’s Personal Notes:

At a the Shanghai Cooperation summit last Tuesday, China promised Central Asian countries a loan of $10 U.S. billion, while Russia challenged the dominance of the U.S. dollar as the global reserve currency. China and Russia are obviously concerned that soaring U.S. budget deficits could cause inflation and weaken the dollar — a justified concern. China and Japan are the largest buyers of U.S. government debt, with China alone holding an estimated $1.0 trillion in U.S. debt. Is there any doubt that interest rates on U.S. bonds will need to rise in order to continue attracting foreign buyers? Higher interest rates are not that far away.

Where the Market Stands:

The Dow Jones Industrial Average continues to tinker with three percent below the breakeven point for 2009. Yes, from its March 9, 2009 low, the Dow Jones is up an impressive 2,099 points, or 33%, a rally the great majority of investors have missed out on. Most analysts are not telling us that the market has gotten ahead of itself and could be overbought. At 47 times earnings, I’d have to agree. However, in the short term, I believe that this market will surprise analysts and investors on the upside.

What He Said:

“Consumer confidence does not change overnight. In the U.S., 70% of GDP is based on consumer spending. And in my life, all the recessions I have seen or studied have only come to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S. personal savings rate at near record lows, it may take two or three years for consumers to start spending again.” Michael Lombardi in PROFIT CONFIDENTIAL, February 25, 2008. By the end of 2008, the rest of the world was realizing that the recession would be much longer and deeper than most had thought.