What a way to go into the holiday weekend, eh? On Thursday, seven banks were shut down by authorities, which pushed the total of failed banks for 2009 to 52 -- which more than doubles the number of bank failures in 2008. Six of the seven banks seized were located in Illinois and the other was in Texas, according to the Federal Deposit Insurance Corporation (FDIC).
According to the federal group, the Illinois failures are interlinked, as all six banks were controlled by one family and used a similar business model. The FDIC noted that this model "created concentrated exposure in each institution." This model left the banks heavily exposed to collateralized debt obligations and other loan losses. The six banks brings the total of failed banks in Illinois to 12.
As for the Texas bank failure, it was the first in the state this year.
Local banks have been hit especially hard during the economic crisis, as a drop in home values has "devalued" mortgage-backed assets. The rising unemployment numbers have also impacted the banks, as more consumers are defaulting on their loans. Unfortunately for the smaller banks, the government has focused on bailing out their bigger brethren, leaving many smaller institutions in the lurch.
The article linked above notes that the total cost of Thursday's bank failures for the FDIC is $314.3 million. Add this to the number of failures thus far and you have a total of $12.3 billion. A year ago, the FDIC took a $17.6 billion hit for the whole year. Is this group going to run out of money?
I don't think that will happen, but what if it did? Would the bank's clients lose all of their money? Remember, the FDIC upped the insurance to individual deposits to $250,000 from $100,000. While this move was made to calm fears about the stability of the nation's banks, I wonder if the move is being questioned at all. I know that hindsight is 20/20, but perhaps leaving the insured amount at $100,000 could have averted any funding problems that the FDIC will encounter as more small banks are destined to fail. Unfortunately for the smaller banks, they are not big enough not to fail, I guess.
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