Regional US Banks May Need Rescuing
While large US banks may be deemed “too big to fail,” this does not apply to regional banks, some of which are likely to collapse in coming months, according to Oxford Analytica.
Well-capitalised foreign banks are beginning to pick up the choicest parts of the distressed US banking sector. However, following several recent regional bank seizures — including the collapse last month of regional thrift IndyMac — a widespread federal rescue package may still be necessary, OxAn says.
While talk of a banking-sector bailout remains politically unacceptable, increasing distress among regional banks means that direct or indirect bailout measures remain a strong possibility, particularly next year.
The Wall Street consensus is that at least 150 institutions may fail over the next 18 months.
Recent federal regulatory interventions strongly suggest that regulators deem the flagship Wall Street consolidated financial institutions ‘too big to fail’ — as in the Federal Reserve’s March decision to broker the sale of Bear Stearns to JP MorganChase (NYSE: JPM). US regulators will also continue to pursue an assortment of policies to prevent major collapses that may exacerbate systemic risk.
- Therefore, the possibility of federal intervention to prevent the outright failure of another large financial institution cannot be ruled out. The same rationale does not exist for directly bailing out regional banks. Nevertheless, federal authorities are likely to take certain steps to cushion the system in the event of several major regional banking collapses.
- Any bailout is unlikely to produce significant new institutional structures. Instead, the Federal Deposit Insurance Corporation (FDIC) might require expanded regulatory authority, and an increase in direct federal funding to protect deposits (rather than continued reliance on a levy on bank deposits to fund deposit insurance).
- If property prices begin to stabilise, a low-key bailout could involve the FDIC quietly restructuring weak institutions or encouraging mergers with sound banks.
Similarly, allowing banks greater leeway to pursue a ‘good bank, bad bank’ strategy may gain greater traction. Under this scenario, a bank spins off problem loans into a separate subsidiary (financed by ‘high-yield’ bonds), allowing the parent bank to strengthen its capital structure, and the subsidiary to hold the problem loans in a portfolio that may ultimately recover in value once property prices rebound. - However, the good bank, bad bank option is not a panacea, because only relatively strong banks can pursue it, and it would be unsuitable for many regional banks currently highly exposed to regional property markets.
If the overall situation continues to worsen, other indirect forms of banking bailout are on the cards, particularly if Democrats gain the presidency and strong congressional majorities in the November elections. These could include more direct measures to prevent foreclosures by providing federal subsidies beyond those created by the recent housing bill; enabling borrowers to continue to meet mortgage payments would have the indirect effect of bailing out banks.
However, the cost of such measures could provoke political fallout, as they might be resented by homeowners who have not overextended themselves, OxAn says.
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August 29th, 2008 at 12:46 pm
[...] were top-of-mind at Research Recap this week. Last week’s popular post from Oxford Analytica, Regional US Banks May Need Rescuing, was the most-read post this week, while S&P “Very Cautious” on US Regional Bank Credit [...]