Banking : crisis in US banking far from over

In 2010, when FDIC called on banks to stump up an extra USD10,000 million in anticipation of large shortfalls in failed banks, some complained that FDIC was overstating the scale of the problem.

But, as 2010 and 2011 wore on, the numbers of failed banks rose - in each year more than 150 collapsed. Most were rescued - after a fashion, a few were not.

The system is simple: FDIC tries to find another bank willing to take over a bank which is failing. In almost every case in the past two years, the acquiring bank has not paid any premium for the deposits which it has taken over. Premises are taken over on commercial terms - or left for FDIC to dispose of.

In most cases, FDIC says, the acquiring bank "agreed to purchase essentially all of the assets." But that statement is disingenuous because there is always a provision that, if the assets go bad, then the losses will be shared between FDIC and the acquiring bank.

Again, no premium is paid - indeed, although FDIC does not say so in its statements, the "assets" are sold at value which is written down to take account of market conditions at their last valuation.

That valuation may be up to four months old by the time the deal is done.

Moreover, the acquiring bank will cherry pick the loans it wants to take. Those that are bad or doubtful, unless backed by substantial security (which is unlikely in the current climate) are left behind. Indeed, in the most recent batch of closures, Tennessee Commerce Bank had declared assets of USD1,185 million but the acquiring bank agreed to take over assets worth only approximately USD204 million.

But even that is not the most startling aspect.

The first seven banks to fail in 2012 expose the FDIC's Deposit Insurance Fund to an estimated risk of USD850.4 million.

Tennessee Commerce Bank's failure is disturbing for another reason. Despite two financial crises in the past decade, the last bank to fail in Tennessee was Bank of Alamo in 2002.

While other states have seen significant numbers of banks collapse, Tennessee was a beacon of hope.

But the implication is that that bank had a loan book that contained an insurmountable amount of bad and doubtful debt.

Underpinning the concerns is the primary one that banking supervisors may have applied more stringent testing than in previous years and that fault lines that had previously been hidden were exposed. More stringent testing is now an obligation under the raft of financial regulation laws that have been put in place since the US government finally admitted that there was a financial crisis (some two years after it was clear that one was looming).

Tennessee Commerce Bank was not left to sink or swim: its holding company, Tennessee Commerce Bancorp, received funding under the Troubled Assets Relief Programme (TARP).

TCB's "troubled assets ratio" has been calculated by the American University School of Communication. They say that it started December 2007 at more or less the national median. It had a small upward flex at the end of 2008 but returned to the national media by December 2009. But starting just three months later, it began an upward climb that rapidly accelerated starting in March 2011. By September 2011, what can be considered its bad and doubtful debt ratio had reached a startling19.5 times the national average (266.9 compared with 13.7). At the same time, says the AUSC, its capital had fallen from USD127.4m in September 2010 to just USD12.7 million in September 2011. Capital plus reserves had fallen by approximately 60%.

The implication is clear: the bank's balance sheet, even with TARP support, was unsustainable. With bad and doubtful debt rising from USD53.6m to USDUSD129.4 m (rounded) over the same period, it was clear that the bank had no hope of independent survival absent a massive capital injection.

According to the AUSC's research, the national median has risen from 5 to a maximum of 15, before falling slightly in the second half of 2011.