Monday, 26 May 2008

Surge in Bank Failures Inevitable

As the short hiatus in the credit crisis after the Bear Stearns bailout begins to fade, the economic realities of one of the biggest financial crises in history are starting to reassert themselves. from

Bank failures to surge in coming years

"At this point in the crisis, you can't stop bank failures," said Joseph Mason, associate professor of finance at Drexel University's LeBow College of Business, who has studied past financial crises.

"At this point you manage through failures and arrange marriages where another stronger bank takes on the assets and deposits," he said. "You move through the problem. You don't avoid the problem. It's too late to wait and hope that things get better."

Things may get worse before they get better. At least 150 banks will fail in the U.S. during the next two to three years, according to a projection by Gerard Cassidy and his colleagues at RBC Capital Markets.

If the current economic slowdown deteriorates into a recession on the scale of those from the 1980s and early 1990's, the number of failures will be much higher this time around -- probably as high as 300 of them, by RBC's reckoning. That's a massive surge compared to the recent boom years of the credit and real estate markets. From the second half of 2004 through end of 2006 there were 10 consecutive quarters without a bank failure in the U.S. -- a record length of time, Cassidy notes.

"This downturn will trigger a significant amount of bank failures relative to the past five years," he said. "There has been excessive loan growth and some banks won't be able to access capital markets to replace the money that will disappear as credit losses rise."

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