You Have No Clue How Bad Bank Balance Sheets Really Are

blackhole tbi

That the FDIC had to raise its estimate for coming losses to $100 billion makes it plenty clear that the state of American banking is far from healthy. But what's scary is not the eye-popping number, it's the lack of insight anyone has into bank balance sheets.

Jonathan Weil at Bloomberg hits the nail on the head:

There was a stunning omission from the government’s latest list of “problem” banks, which ran to 416 lenders, a 15-year high, as of June 30. One outfit not on the list was Georgian Bank, the second-largest Atlanta-based bank, which supposedly had plenty of capital.

It failed last week.

Georgian’s clean-up will be unusually costly. The book value of Georgian’s assets was $2 billion as of July 24, about the same as the bank’s deposit liabilities, according to a Federal Deposit Insurance Corp. press release. The FDIC estimates the collapse will cost its insurance fund $892 million, or 45 percent of the bank’s assets. That percentage was almost double the average for this year’s 95 U.S. bank failures, and it was the highest among the 10 largest ones.

The obvious worry is that there are a lot more Georgian Banks out there than anyone realizes. Granted, if the FDIC can raise 3-years worth of fees by borrowing forward from its member banks, we can handle a lot of Georgian Banks. And in the end, handling smallish, regional banks isn't going to prove to be a major systemic problem, even if there are several of them.

What's scary is that this level of opacity likely extends upwards to the ranks of the too-big-to-fail institutions that can't be rescued merely by making depositors whole. As the story about JPMorgan's (JPM) Jamie Dimon -- sitting in his office, examining the bank's CRE exposure by zipcode suggests -- even most of the banks have no idea what they're holding. How oculd regulators?

Join the conversation about this story »

See Also: