Bank Failures: How Many More This Year? - Christine Barry, Aite Group LLC
To gain insight on market trends, we interviewed Christine Barry of AITE Group LLC on:
Barry serves as a Research Director at Aite Group LLC, focusing on the strategies and technology implementations of global banks of all sizes. Her recent research has addressed remote deposit capture, best-practices for credit unions, capturing the valuable small-business customer, global cash management trends, and core banking system replacement. She is an acknowledged banking industry expert with more than a decade of experience in financial services products and technologies. She has worked with a broad range of U.S. and international clients analyzing industry trends and identifying market opportunities, product gaps and potential partners to help them achieve their strategic IT goals.
TOM FIELD: Hi, this is Tom Field, Editorial Director with Information Security Media Group. We are talking today about bank failures, and we are talking with Christine Barry, Research Director with the AITE Group. Christine thanks so much for talking to me today.
CHRISTINE BARRY: Thank you.
FIELD: Christine, the big news this past weekend of course was that Colonial Bank was closed and sold to BB&T. It is the largest closure so far in 2009, but what is your sense? Is it going to stay the largest, or is it going to be exceeded before this year is out?
BARRY: Well, Tom I am going to take an optimistic stand, and I really do believe that this is going to be the largest closure that we see this year. The government regulators have really been keeping a pretty close watch on some of the largest banks, and recently we have even seen some positive earnings announcements coming out of some of the larger banks. So unfortunately, Colonial was really at a point of no return. They had a really big stake in the Florida real estate collapse, and they also had a pretty large presence in Georgia. So it was difficult for them to overcome many of their challenges, but I think some of the other large institutions are a little more stable today, so unfortunately it will be just a lot of the smaller institutions failing through the end of the year.
FIELD: Well, let's talk about that because already we have seen more than three times the bank closures this year than last. What are the trends that you are watching?
BARRY: Well, we are certainly watching the increased rate at which banks are closing, and it seems that it has certainly picked up pace a lot faster than what we saw last year. We are also closely watching the location of a lot of the bank failures, and they seem to be in certain areas, with the majority of them places like Illinois and California, Georgia and Florida.
We are also watching some of the precautions that banks are starting to take. There is certainly a much greater focus on gathering deposits to stabilize their balance sheets. We are also seeing banks with much tighter underwriting standards, and they are certainly focusing a lot more on risk management than they were in the past.
FIELD: Now we know that that there are 300 banks, a little bit more on the FDIC's troubled banks list now, and I hear people say that they believe that the actual list exceeds even that. How many more failures do you think we can expect to see in this calendar year?
BARRY: I think at this point we have already seen about 75, and I am hearing that the number by year-end could be as high as 150. I believe that that's probably a realistic number again given the increased pace that we are seeing bank failures, but it is important to point out that it is still not nearly as high as during the savings and loan crisis in the 80's, and also there still are over 7,500 banks in the U.S. So while a large number of them are struggling, at least what we are finding in our research is that far more are actually seeing some opportunities in this market. So it is not all gloom for all of the institutions, but I do believe that it probably will hit about 150 this year.
FIELD: Now given the acquisitions that we have seen, and we see some institutions names coming up frequently as the acquirers, how do you see the banking landscape being reshaped by this spade of failures and subsequent acquisitions?
BARRY: I think in the end we are going to actually have a much strong financial services industry, and we are going to have banks that are a lot better capitalized. We had actually done some research and we had spoke with about 800 community banks earlier this year and we found that over 80 percent of them have actually built up their reserves since the start of the crisis, so we are seeing a lot of banks focusing on initiatives such as that, we are also more likely to see much less risk taking than we did in the past, so we will see much stronger and much more stable institutions. There will certainly be much fewer institutions than what we have had in the past, because of all the mergers and acquisitions, but I think that is really enabling the banks that end up standing in the end to be a lot stronger with much broader product portfolios and more stable balance sheets.
FIELD: So Christine, we have got a little over four months to go before the end of the year, for people who are watching what happens in the banking industry, what are some of the areas they should keep an eye on between now and years end?
BARRY: Some of the things that we are keeping track of are banks' usage of technology and just precautions that they are taking. So by using technology they are able to better focus on risk management to better predict any defaults that they are going to have in loans. There are a lot of new credit tools that are available in the market. We are looking for banks to be stricter with borrowers as far as requiring more information. And then I guess the final recommendation that I would make to observers is to just continue to follow some of the economic indicators. We are closely watching the housing market and unemployment because unfortunately until those do better, banks are going to continue to struggle.
FIELD: Christine, as always, I appreciate your time and I appreciate your insight.
BARRY: No problem, thank you.
FIELD: We have been talking with Christine Barry with the AITE Group. For Information Security Media Group, I'm Tom Field. Thank you very much.