SKARBECK: For numerous banks, times still troubling

Every Friday after the markets have closed, my e-mail starts getting dinged by the FDIC. That is when the government agency
publicly announces the names of banks that failed during the past week.

By releasing the names late Friday, the
bank’s constituency and the markets have the weekend to digest the news. So far this year, 77 banks have failed.

The messages follow a standard format, in which the FDIC declares it has become receiver of the failed bank and announces
a new institution is taking over the bank’s business. The bank’s customers are instructed to continue to conduct
their normal banking functions over the weekend, such as writing checks, using ATMs and debit cards, and making loan payments.
Clearly, the FDIC wants banking customers and the financial markets to experience as little disruption as possible.

The releases go on to list the total assets and deposits of the failed banks and discuss the basic terms of the purchase
between the FDIC and the acquiring institution. They explain the assets being acquired and the deal the acquirer made with
the FDIC regarding future loss-sharing on bad assets.

Next, the FDIC gives an estimate of what the failure will
cost the Deposit Insurance Fund. The announcement concludes with the updated number of total bank failures for the year and
within the particular state where the institution was located.

Troubling regulators today is that, while bank failures
are fewer in number than in the last banking crisis in the early 1990s, the banks failing today are in worse shape. The
Wall Street Journal
reports that, of 102 banks that have failed in the past two years, the cost to the FDIC’s DIF
has averaged 34 percent of assets, versus a rate of 24 percent for bank failures between 1989 and 1995, when 747 financial
institutions were closed.

At the end of March, the DIF had fallen to $13 billion even while the FDIC’s undisclosed
list of troubled institutions numbers more than 300. The DIF is funded by premiums assessed to banks, and in the second quarter
of 2009 the agency imposed an emergency fee to raise more than $5 billion.

The DIF took a big hit on Aug. 14, with
the failure of Colonial Bank, a regional bank headquartered in Montgomery, Ala., that will cost the fund $2.8 billion—the
largest bank failure year-to-date.

As failures have risen, the FDIC has sought to expand buyers for bad banks with
the agency in recent months courting private equity funds. However the FDIC’s initial set of proposed guidelines to
buy failed banks did not endear the private-equity crowd.

Investor Wilbur Ross called the guidelines “harsh
and discriminatory” as one requirement would have a private-equity-owned bank maintain a 15-percent equity-to-assets
ratio, or three times higher than the regulatory standard for banks today. There will likely be some compromise on terms since
private equity has the capital to buy bad banks, even though critics contend their investment strategies are not well-suited
for the fragile banking system.

So, while most large banks avoided an unceremonious demise courtesy of the taxpayer,
a number of smaller banks will not be rescued. Their losses will be absorbed by the DIF and deals will be cut with new owners
on the “good” assets. And with problems in commercial real estate escalating, I shouldn’t expect any let-up
in those Friday e-mails.•

———-

Skarbeck is managing partner of Indianapolis-based Aldebaran Capital
LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827
or ken@aldebarancapital.com.

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