U. S. Banks Sitting on Slippery Slope

Below is an article that appeared in OKC.Biz

U.S. banks sitting on slippery slope

Dean Anderson

7.22.2010

Ross Hill of Bank2 says too many people are playing the blame game. Banks are failing at their fastest rate in decades, but only three lending institutions have gone under in the past 19 years in Oklahoma.

Largely operating as a mirror of the local economy in which they operate, Oklahoma’s banks may be one of the largest bodies of evidence in the argument that the state’s economy is largely insulated from the national economic woes.

And with no bank failures through the start of summer in the Sooner State, and just one this decade, that argument appears sound.

“Oklahoma has been insulated from many of the problems of the economy,” says Ross Hill, president and CEO of Bank2 in Oklahoma City. “Real estate never got overheated, and it wasn’t speculative. We have a more robust economy this time around, which helped us not feel as much pain as we did before.”

With more than 80 American banks going belly up through June, the failure rate was double that of 2009 through the same time. Estimates place the total number of failures somewhere in the 140s – the highest since 1992.

According to the Federal Deposit Insurance Corporation, 565 banks failed nationally from 1992 through June 2010. Of that total, 148 were turned over to the FDIC in 2009 at the height of the banking crisis, and another 181 when the tech bubble burst in 1992.

During that time period, bank failures have been a rarity, with fewer than 10 institutions a year failing for 12 of those years, and no banks failing during 2005 and 2006.

LESSONS LEARNED

“Those of us who have a little gray hair can remember how difficult those days were and how detrimental they were to our own economy,” Hill says about the mid-1980s. “It helps us feel their pain a little bit.”

The mid-’80s were awful, to say the least, for Oklahoma banks. The failure of Penn Square Bank grabbed headlines, but it was one of many.

In 1985, Oklahoma, Kansas and Nebraska led the nation in bank closures, with 13 apiece. Another 16 state institutions failed in 1986, with local observers dubbing Oklahoma “the home of the FDIC.”

Hill says sometimes bank failures come down to a handful of bad decisions here or there. A bad commercial loan to a high school buddy or too large of a line of a credit to a trusted friend of the family can sink a smaller institution.

But at the end of the day, it’s the local economy as a whole that either floats or sinks all surrounding ships.

SAME GAME, DIFFERENT RULES

The Obama administration took steps last year to make sure the industry was on solid ground. Ramping up FDIC insurance to $250,000 per account was one of the higher-profile moves to bolster consumer confidence.

Behind the scenes, more pressure was applied on the institutions themselves.

To help shore up the deposit insurance fund, the FDIC mandated U.S. banks to prepay around $45 billion in premiums for 2010 through 2012 last December. Of that amount, $333 million was paid by Oklahoma banks.

While Roger Beverage, president and CEO of Oklahoma Bankers Association, says that amount wasn’t enough to create a financial hardship on banks, the consumer will feel it the most.

He says conservative banks operate on a 3-to-1 capitalization ratio, meaning for every dollar reserved, three can be loaned out. Take $333 million in capital out of Oklahoma banks, and that translates into nearly $1 billion in lost lending.

And then there’s looming legislation in some form to further tighten banking regulations.

Beverage says bankers are paying close attention to current measures and cringing. Earlier this year, Sen. Susan Collins (R-Maine) introduced legislation that would bar banks from used trust-preferred securities as sources of Tier 1, or lending capital.

“With the stroke of a pen – if that doesn’t change – then 640 banks in the country that issued trust-preferred securities – which, by the way, they were encouraged to do so by the then-head of the FDIC – will be undercapitalized,” Beverage says. “An additional 1,500 will then have a hit. This is the kind of stuff bankers are sitting out there saying, ‘What in the world is going on in Washington?’”

At the end of the day, Hill says it doesn’t always come down to good loans or bad loans. It’s something more basic.

“I think it’s integrity,” he says. “We want to play the blame game: The big banks did this to people, the mortgage brokers did this to people. As Obama calls it, the ‘fat-cat bankers’ did this to people. Where is the personal responsibility in all of this? Are you going to suggest somebody can’t figure out they can’t afford a certain dollar amount of house payment?” —Dean Anderson
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