FDIC: Banks Improve, Problem Institutions Continue to Decline

FDIC: Banks Improve, Problem Institutions Continue to Decline

According to the FDIC's Quarterly Banking Profile for the first quarter of 2012, which can be found here and which was released on May 24, 2012, the banking industry generally continues to show improvement. The industry's aggregate profits are up, and the industry is shedding bad loans, bolstering net worth, and increasing profitability. In addition, the number of banks that the FDIC ranks as "problem institutions" continues to decline. The FDIC's May 24, 2012 press release about its Quarterly Banking Profile can be found here.

According to the report, as of March 31, 2012, there were 772 problem institutions, compared to 813 as of the year-end 2011, and 888 as of year-end 2010. (A "problem" institution is a bank to which the FDIC has rated as either a "4" or a "5" on the agency's 1-to-5 scale of ascending order of supervisory concern. The FDIC does not identify the problem institutions by name.) The quarterly decline in the number of problem institutions represents about a 5% drop, and the decline during since March 31, 2011 represents about a 13% drop.

According to the FDIC, the 1Q12 decline in the number of problem institutions represents the fourth consecutive quarterly decline. The number of problem institutions is now at its lowest level since year-end 2009.  The assets of "problem" banks fell during the first quarter from $319 billion to $292 billion. As recently as the end of 2009, the problems institutions assets' were as much as $402 billion.

Though the total number of problem institutions has declined, the number of reporting institutions has also continued to decline (due to mergers and closures). The 772 problem institutions represent about 10.5% of all reporting institutions as of March 31, 2012. Even though that is the lowest absolute number of problem institutions since year-end 2009, the 702 problem institutions as of year-end 2009 represented only about 8.5% of all reporting institutions at that time. Thus, though the total number of problems institutions has declined, as a percentage of all institutions the number of problem institutions remains at elevated levels.

In other words, the declining number of problem institutions does not necessarily mean that the number is declining because of improvement among problem institutions. In larger measure, the number of problem institutions is declining because many of the institutions formerly assessed as problems simply no longer exist, whether as a result of mergers or closures.

On a more positive note, the 16 bank failures during the first quarter of 2012 represents the smallest quarterly number of bank closures since the fourth quarter of 2008, when there were 12 bank failures. The 16 bank failures in 1Q12 compares to the 26 bank failures in the first quarter of 2011. (As of today, there have been a total of 24 bank failures so far during 2012, compared with 43 YTD bank failures on the same date in 2011).

The decline in the number of banking institutions during the current banking crisis really has been remarkable. As recently as year-end 2007, there were 8,649 reporting institutions. The 7,307 institution remaining as of March 31, 2012 represents a decline of 1,342 banking institutions, or a decline of about 15.5% during that period.

The remaining 7,307 banking institutions are largely concentrated in the community banking space. As of March 31, 2012, 6,643 (or about 90.9%) of the 7,307 remaining banks had assets less than $1 billion. Only about 107 institutions (or 1.5% of all institutions) had assets of $10 billion or greater. 

While the number of problem institutions and failed institutions has been declining, the FDIC has been increasing the number of lawsuits it has authorized against the former directors and officers of failed institutions. As of the FDIC's latest update on May 15, 2012, the FDIC has authorized suits in connection with 63 failed institutions against 549 individuals for D&O liability. This includes the 29 lawsuits involving 28 institutions that the FDIC has already filed, naming 239 former directors and officers. The implication is that there are many more lawsuits in the pipeline - although interestingly, the FDIC has not filed any new lawsuits in over a month. The last lawsuit that the FDIC filed was filed on April 20, 2012.

"The Most Serious Natural Resources Shortage You've Never Heard Of": We can live without oil, but we can't live without food. For decades, the world has been able to feed a growing population by using phosphorus-rich fertilizer to increase crop yields. The problem is, we are running out of phosphorous.

My research biologist brother-in-law has been telling me for years about the dwindling supplies of phosphorus. The looming phosphorus shortage is the subject of an April 20, 2012 article in Foreign Affairs entitled "Peak Phosphorus" (here), which warns that there "will not be sufficient phosphorus supplies from mining to meet agricultural demand within 30 to 40 years." The consequences of the looming shortage will be felt long before the supplies finally run out. Even in the short run, increased demand and decreasing supplies "will result in higher prices, significantly affecting millions of farmers in the developing world who already live on the brink of bankruptcy and starvation."

Tensions about control over phosphorus supplies have already been the source of significant issues involving Morocco (where the largest number of phosphorus mines are located) and Western Sahara, a disputed independent territory that is Morocco currently occupies. China, the country with the second largest reserves, has already once resorted to trade tariffs that effectively eliminated exports in 2008, which was a contributing factor to dramatically rising food prices that year. While the U.S. historically has been a leading source of phosphorus, the supplies from its most productive mines have been declining rapidly. As a result, the country, which has been a phosphorus exporter for decades, is now imports as much as 10% of its supply.

As the article notes "establishing a reliable phosphorus supply is essential for assuring long-term food security." The most important step is to reduce the demand for phosphorus by "eliminating wasteful practices" - phosphorus can be used over and over, and effective conservation techniques could significantly expand the usefulness of remaining supplies. In addition, there is a significant promise in the development of new, phosphorus-efficient foods. 

If we fail to respond to the challenge, however, "humanity faces a Malthusian trap of widespread famine on a scale that we have not yet experienced. The geopolitical impacts o such disruptions will be severe, as an increasing number of states fail to provide their citizens with sufficient food." This "dark scenario" is not inevitable, but in order to avoid this destiny, the threats involved with the looming phosphorus shortage must be addressed.

 Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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