A rush of government-aided acquisitions has bestowed a too-big-to-fail halo over the likes of JP Morgan Chase, Bank of America and Citigroup.
But what about the formidable regional banks that operate more than half the bank branches in the Indianapolis area? How stable are banks like National City, Huntington, Fifth Third, Key, M&I and Regions?
Their shares have endured a rough ride on Wall Street, but there's little evidence the ups and downs reflect the true health of the institutions. In a three-day span, as Congress considered a $700 billion Wall Street rescue, shares in Cleveland-based National City Corp. fell more than 60 percent before bouncing back strongly, doubling to more than $3 per share.
There is no playbook for the current crisis, but there is a playing field. Survival, banking analysts say, comes down to two Cs: confidence and capitalization.
And that raises two more questions without easy answers: Do the banks have enough set aside to cover loan losses and write-downs? And does the public have enough confidence to keep their deposits there?
Each of the banks has taken action to add capital and write down bad loans, and they're working to persuade customers to stay the course. Of course, not all regional banks are in the same category: Most observers believe National City and Fifth Third are the most bruised.
At a reception a few weeks back, bank analyst John Reed talked about the confidence question with an executive at a strong regional bank. The gist: No financial institution has enough cash to survive a modern-day run on the bank. Before Washington Mutual Bank, the nation's largest savings and loan, failed last month, customers yanked about $17 billion in deposits-about 9 percent of the bank's total.
"It's totally a confidence game," said Reed, executive vice president in the local office of Chicago-based investment firm David A. Noyes & Co. "Banks aren't lending to banks. No one has confidence. Everyone is in survival mode."
National City has gone on the offense to emphasize its stability. The bank says it is far better capitalized and has much less mortgage exposure than Wachovia, which fell into a government-arranged marriage with Citigroup.
Back in April, before the outlook was so grim, National City took the painful step of raising $7 billion to recapitalize the bank, a move that diluted existing shareholders but also helped the bank survive another day.
National City spokeswoman Kristen Baird Adams points to analysts' buy recommendations on the bank and said wild swings in its stock are caused by "fear and irrational speculation."
John Pelizzari, the president for Fifth Third in central Indiana, said it'll take a year or more for the economy to find firm footing, but well-run regional banks will survive and thrive again.
"We feel very comfortable about where we're sitting," he said. "The economy is pretty resilient and has proven over and over again that it does come back."
When the swings in price don't correlate with underlying weakness in a bank's asset quality, it makes investment decisions difficult, said Mike Renninger, principal of Carmel-based banking consulting firm Renninger & Associates LLC.
"What we don't know truly can hurt us," Renninger said. "While we think that based on publicly available information that they have adequate reserves and that their performance and asset quality would justify a higher price, the market is speaking for itself, saying no, this is where willing buyers and willing sellers meet."
At least some of the stock volatility can be blamed on discussions about the government rescue package. If Congress approves the plan (no final vote had occurred by IBJ's deadline) and it is judged by the market as adequate, it could be a game changer for regional banks.
"Right now, everybody is spooked about everything," said Reed, who is personally bullish on most regional bank shares. "Everyone is circling the wagons and climbing into their tortoise shell. If the rescue plan is defeated, there will be a ton of bank failures, and business failures. Think bad and it'll be worse."
The turmoil already has accelerated consolidation, and most observers expect a regional bank or two with an Indianapolis footprint could disappear, potentially scooped up by a too-big-tofail bank. Three of the nation's four largest banks-Bank of America, Citigroup and Wells Fargo-don't yet have a retail presence in Indianapolis, but that could change.
"Some of these regionals have been hurt by the mortgage crisis and had to take large write-downs, but they've taken action to bolster their capital and recognize their losses and position themselves to move forward," said Morris Maurer, president of The National Bank of Indianapolis, the largest locally based bank.
If one of the regionals fails, Maurer expects the outcome might follow the Washington Mutual example: a failure followed in quick succession by a government-orchestrated takeover by a larger bank in a sweetheart deal for the buyer.
But Maurer thinks most of the consolidation is behind us.
"All the really weak players hurt by the mortgage crisis have had something happen to them already," said Maurer, a former executive with Indiana National Bank, which acquired 16 banks in six years before selling to National Bank of Detroit in 1992. "Most write-downs have been taken; most of the losses are apparent."
The turmoil for big regional banks may present an opportunity for community banks like National Bank of Indianapolis.
Fort Wayne-based Star Financial Bank is benefiting, too, said John McCreary, the bank's regional president. Star's new two-week CDs are a hit, and the bank is hearing from potential business clients that didn't give it a second look before.
"On both the consumer and commercial side, we're seeing a significant number of customers we just don't see in normal circumstances," McCreary said. "The opportunities are coming pretty quickly, but it's not the way you want to gain opportunities. I hope for the whole industry that things settle down."