Pushing banks to the brink

America's banking sector is reeling from the credit crunch but Europe's banks are also feeling the pressure, writes Proinsias O'Mahony

THE NUMBER of US banks in danger of collapse has risen by 30 per cent in the last three months and is at its highest in five years.

There were 117 banks on the "problem list" of the Federal Deposit Insurance Corp (FDIC) at the end of June, up from 90 in the first quarter, with chairwoman Sheila Bair warning that "more banks will come on the list as credit problems worsen".

Total assets of troubled banks tripled from $26 billion (€17.6 billion) to $78 billion in that time although IndyMac, which collapsed in early July, accounted for $32 billion of that total.

Furthermore, the rate of deterioration in banks is accelerating. At the end of last year, there were 76 banks on the list, with another 14 joining the troubled ranks in the first quarter of 2008. In the second quarter, another 27 banks swelled the list further. The number of new entrants is actually greater again as nine banks have already failed this year and were therefore removed from the list.

The FDIC, which reimburses depositors up to a maximum of $100,000 for individual accounts, admitted that it might have to replenish its depleted funds by borrowing money from the treasury department in the event of a wave of bank failures. The last time it was forced to borrow such funds was in the early 1990s, when more than 800 banks collapsed in the aftermath of the so-called Savings and Loan crisis. It said that its deposit insurance fund fell to just 1.01 per cent of all insured deposits, below the legal requirement of 1.15 per cent.

Ms Bair noted that banking results have been "pretty dismal", with the industry's net income plummeting to below $5 billion in the second quarter. That's 87 per cent below the $36.8 billion recorded a year ago and is the second-lowest figure since late 1991. "We don't see a return to the high earnings levels of previous years any time soon," she added.

Loans overdue by 90 days or more rose by 20 per cent to $162 billion, with the number of troubled loans exceeding 2 per cent for the first time since 1993. Clearly, this figure is expected to continue going north - over the last year, banks have quadrupled funds set aside to cover loan losses to more than $50 billion. The FDIC figures are further confirmation of the troubled state of the US financial sector. Last week, rating agency Standard Poor's said that it had a "negative" outlook on almost half of the 50 highest-rated financial institutions in the US - the highest proportion in 15 years. Morgan Stanley co-president Walid Chammah was similarly bleak, warning that the credit crisis may stretch into 2010 with likely "more insolvencies among small US regional banks that have focused on mortgage business".

Quoting his old adage that you only know who's been swimming naked when the tide goes out, Warren Buffett this week quipped that "we found out that Wall Street has been kind of a nudist beach".

Financial problems extend beyond Wall Street, however, as this week's collapse of Danish bank Roskilde showed. Despite having no subprime losses and access to central bank funds, the bank went under as a result of "a large exposure" to Denmark's falling commercial property market. It admitted that real estate write-downs had caused pretax losses in the first half of 2008 that were double the estimates provided less than six weeks ago.

Denmark's central bank, in partnership with a group of Scandinavian institutions, took over Roskilde, providing it with 4.5 billion kroner (€603 million) in cash and assuming 37.3 billion kroner in debt.

Central bank governor Nils Bernstein said that Roskilde, the country's eighth-largest bank, was an "isolated case" and that he had "no knowledge of similar problems in other banks". Despite that, his warning that a bankruptcy would have caused "considerable contagion throughout the financial sector" and that nationalisation was required to "secure financial stability in Denmark" reflected the gravity of the situation.

The €5 billion bailout pales in comparison to the rescues at Bear Stearns and Northern Rock. Nevertheless, it is the biggest bank rescue in Scandinavia since the early 1990s and the fact that Roskilde's problems were triggered by a rapidly deflating property market means that some analysts are speculating that it may be a forerunner of things to come in Europe.

The Financial Times'sinfluential Lex column notes that the bailout could be "proportionately higher" than the aforementioned cases "given the size of the Danish economy". All this, Lex says, "from a regional lender with only 26 branches, fewer than 100,000 customers, and top marks from ratings agencies only a year ago. We have been warned".