Bank Failures

Last week the Federal Deposit Insurance Corp. (FDIC) that backs bank deposits identified 76 banks as "in trouble." These 76 banks are likely only a small part of the impending economic problems looming over the banking sector. Within the upcoming year experts are expecting about 200 bank failures, this is almost as much as the record 206 bank failures that occurred in 1989. So far this year only one bank has failed (the Douglass National Bank in Kansas City, MO). Thankfully, the banks at highest risk for failure are generally smaller ones.

Why are these banks at risk for failure? According to financial services analyst Jeret Seiberg, "Many of these banks are highly dependent on construction lending, and that's the area of lending that is likely to come under the most stress." In the past 6 months the number of construction loans that are 30 days or more delinquent has spiked to 7.5% (up from 3.1%). However, the nation's major banks aren't exempt from economic threat. Seiberg says, "Tighter capital among the nation's major banks poses an even greater economic threat than hundreds of small bank failures."

Of greatest concern to economists is that banks will pull back and not make new loans which provide the "life blood of the economy." Federal Reserve Chairman Ben Bernake summed up the impending problem nicely: "This economy lives and dies on credit. If the megabanks are stuck with billions of leveraged loans eating up precious space on their balance sheet, they won't be able to originate new loans. That's bad for everybody."

Do you think we're headed towards a recession? What do you think the government should do to prevent a recession? How much do you think it will effect the economy if only smaller banks close down? What are your thoughts on the national state of the economy?