New Trend in Bank Seizures?

Highlights include Citigroup Inc. (C), Bank of America Corp. (BAC), SunTrust Banks, Inc. (STI), Wells Fargo & Co. (WFC) and BB&T Corp. (BBT).

New Trend in Bank Seizures, or Just a One-Off Event?

It has become de rigueur -- if it's a Friday, there's going to be another bank or thrift being seized by the U.S. Banking regulators (the Office of the Comptroller of the Currency).

And this Friday was no exception, with two banks seized: Citizens Community Bank in Ridgewood, NJ and Silverton Bank in Atlanta, GA. This brings the number of seized banks and thrifts to 29 for 2009.

However, Silverton was a commercial bank that provided correspondent banking services (credit card operations, clearing accounts, investments, consulting, purchasing loans and selling loan participations) to its client banks and did not take deposits directly from the general public -- nor did it make loans to consumers (with $4.1 billion in assets and $3.3 billion deposits from 1,400 client banks in 44 states, and operated six regional offices) was the largest bank failure so far this year and the largest seized since Downey Savings & Loan (which had $12.8 billion in assets).

While we have yet to see anywhere near the levels of banks and thrifts seized by the regulators achieved during the problems of the late 1980's-early 1990's, so far this year there have been 1.69 seizures per week. If we stay on this trend, we could see 80-100 institutions seized by the end of this year.

Our concerns following the delay of the release of the "Stress Test" of the 19 largest financial institutions (please see Neena Mishra's blog for greater detail), to include but not limited to Citigroup (C), Bank of America (BAC), SunTrust (STI), Wells Fargo (WFC) and BB&T (BBT) has not been mitigated our concerns for the industry and the economy as a whole. We would anticipate that the rationale for not releasing the information was that a number of the institutions in question vehemently disagree with the findings of the tests, are challenging the results and/or looking for alternative avenues of capital raises to achieve the required levels as they are still considered too big to fail. (And perhaps if several were to go under or be seized, the drain on the FDIC reserves would wipe out the fund.)

Clearly banks are not wanting to be in a position to make additional loans anywhere near the level they had been able to even early last year. Foreclosure rates and defaults have begun to rise again following the lifting of the government's moratorium.

In addition, commercial real estate has been becoming more of a concern. Unless something is done to get the financial institutions back in the business of lending, we could only conclude that recent glimmers of economy improvement are not sustaining and the markets' rebound may only materialize into a bear-market rally.

Read the full analyst report on WFC