WASHINGTON – When 2008 made its debut some were predicting that as many as several hundred banks would fail and would be taken over by regulators. Yet while the year saw the collapse of Washington Mutual as well as the largest bank failure in history, that of IndyMac Bank, only 25 banks failed – well short of what many had feared.
Observers offer a range of reasons, from the government's direct investment in healthy institutions – which spurred some banks to buy troubled ones – to its efforts to back bank debt and guarantee liquidity. They also cite a lagging business cycle that has yet to finish off some troubled institutions, regulators that are stretching out the timetable for failures to conserve resources and prevent panic, and other factors.
Though observers agree 2008 was not as bad as expected, most continue to have a bleak outlook for next year. They say the pace of failures – which accelerated dramatically since IndyMac failed July 11 – is liable to increase.
"Next year will probably look much like the second half of this year," said Robert DeYoung, a finance professor at the University of Kansas' School of Business. "This process crosses the year, and failures tend to lag business activity. Even though we're way below what some people expected, we should continue to see banks become insolvent as we go forward."
The Federal Deposit Insurance Corp. clearly is anticipating as much. It nearly doubled its budget for next year, to $2.24 billion, with the vast majority of the money going to its resolution and receiverships division. That division is expected to add more than 800 employees to keep up with the pace of failures.
There were 171 institutions on the troubled-bank list, holding $115.6 billion of assets, at the end of the third quarter. Most experts said they expect that list to grow.
But several industry watchers said some of the government's actions have prevented the failure tally from reaching the expected triple digits. The Treasury Department has pledged $250 billion to invest directly into banks, and has distributed all but $80 billion of that.
Though Treasury officials said the money would not go to ailing banks, some troubled institutions clearly have benefited from it. Central Pacific Bank in Honolulu on Dec. 9 said it had received $135 million from the Treasury's Troubled Asset Relief Program – the same day it announced a memorandum of understanding with federal and state regulators. The $5.4 billion-asset bank said it planned to use the money to increase its capital ratio to 9% within six months.
Other institutions have used the extra capital to buy failing banks. Analysts said they doubted National City Corp. could have survived on its own without PNC Financial Services Group Inc.'s offer to buy the Cleveland banking company. Also, some large insurers have struck deals to acquire troubled thrifts in order to have access to Treasury capital.
"Absent the intervention, there would be more bank failures," Prof. DeYoung said.
Though the decision to fail a bank ultimately resides with the chartering agency, not the FDIC, some said the agency has also been managing the pace of failures this year to avoid a resource crunch and prevent further deposit panic.
