US Finance World

Bank Failure Friday closed four more private banks. The FDIC Deposit Insurance Fund haunts banking. The NAHB worries about tougher regulatory guidelines on CRE lending. Restating the ignored regulatory guidelines yet again! I look at the daily charts for Housing, and Community and Regional Banks.Bank Failure Friday – Four more private community banks failed last Friday, bringing the total for the first quarter of 2010 to 41. At this pace the FDIC will close 164 banks this year, well within my predicted 150 to 200 failures in 2010. This brings the total since the end of 2007 to 206, on the way to 500 to 800 by the end of 2012 and into 2013. All four failures were extremely overexposed to C&D and CRE loans with loan pipelines between 88.7% and 100%. Key West Bank in Florida had exposures higher than I have ever seen; 4015% for C&D when the guideline is 100% and 20,216% for CRE when 300% is the guideline.The Deposit Insurance Fund (DIF) has now been tapped for $6.5 billion in 2010, bringing the DIF deficit to $27.4 billion excluding the prepaid $46 billion that sits on the sideline for 2010 through 2012. Another prediction still stands is that the FDIC will tap its $500 billion temporary line of credit with the US Treasury this year. At this pace of DIF Drain, the FDIC will need $26 billion to cover closures in 2010. This would make the DIF $18.6 billion short if you used up all prepaid fees. The FDIC wants to allocate just 1/3 of the $46 billion in 2010, that’s just $15.3 billion, which puts FDIC already in the hole by $12 billion, which justifies tapping the Treasury now.

The NAHB is worried about tighter CRE standards. With the Comptroller of the Currency John Dugan recently stating that new tougher lending standards for CRE lending are on the way, the National Association of Home Builders is worried that tighter lending conditions would further hurt the market for new homes. Some builders are reporting that current C&D loans that are current are being called in by community banks.With so many community and regional banks overexposed to the current guidelines that have been ignored by the Comptroller of the Currency, I will reserve judgment until the guidelines are made public.These guidelines are extremely important and I review them frequently.Back in the fall of 2005, the Federal Reserve, US Treasury and the Federal Deposit Insurance Corporation (FDIC) realized that community banks were loaning funds to the housing and real estate markets at a pace above what these regulators thought as prudent. Guidelines were set and monitored via quarterly filings to the FDIC. These guidelines were formalized by the end of 2006. They included the following stipulations:Overexposure to construction and development loans: The first guideline states that if loans for construction, land development, and other land are 100% or more of total risk capital, the institution is considered to have loans concentrations above prudent risk levels, and should have heightened risk management practices. Overexposure to construction and development loans including loans secured by multifamily and commercial properties: If loans for construction, land development, and other land, and loans secured by multifamily and commercial property are 300% or more of total risk capital, the institution would also be considered to have a CRE concentrations above prudent levels, and should employ heightened risk management practices.There are 380 publicly traded banks overexposed the C&D loans, and another 372 overexposed to CRE loans only. That’s 752 publicly traded banks that are candidates for the ValuEngine List of Problem Banks.Looking at all 8,012 FDIC-Insured Financial Institutions we find 1,514 overexposed to C&D loans, and another 1,312 overexposed to CRE loans only. That’s 2,896 banks or 36.1% of the 8,012 at risk of failure.Looking at loans versus loan commitments, which I call Pipeline even more banks are feeling additional stress. A “normal” or “healthy” pipeline is when 60% of the C&D and CRE loans are outstanding versus a bank’s total commitment to these types of loans. Of the 8,012 FDIC-Insured Financial Institutions only 594 or just 7.4% have a pipeline between 55% and 65%. Most bank failures have a pipeline above 80%, which is a sign of collection problems: 4,172 banks or 52% have this stress characteristic. Of these, 1,406 have a pipeline that’s 100% funded, which is 17.5% of all banks.Housing Sector Index (HGX) has a neutral daily chart with the index up 10.5% year to date. HGX is below weekly resistance at $115.89 in front of tomorrow’s Case-Shiller Home Price Index, which I suspect will begin to show difficulty in continuing the slight improvement in prices, since mid-2009. The 21-day simple moving average is support at 110.35. (Click to enlarge) Chart Courtesy of Thomson / ReutersAmerica’s Community Bankers’ Index (ABAQ) has a neutral daily chart with the index up 12.2% year to date. ABAQ is above my monthly pivot at $160.62 with a pivot this week at $165.33, and semiannual and annual resistances at $181.00 and $195.07. Chart Courtesy of Thomson / ReutersThe Regional Banking Index (BKX) has a neutral daily chart with the index up 22.1% year to date. BKX is above weekly support at $50.88 with monthly resistance at $53.72. Chart Courtesy of Thomson / ReutersDisclosure: No Positions

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