The FDIC reports that 83 banks have been closed so far this year.  While there were 140 bank failures in 2009, we are on track (based on a simple extrapolation of current trends) to experience at least 160 bank failures in 2010.  This is down from my month-ago extrapolation of 180 failures. 

These failures are occurring while the Fed is paying interest on excess reserves, which has the effect of removing or tightening credit in the banking system.  One would think that in this recessionary environment the Fed would implement a credit relaxing policy rather than a credit tightening policy.  Rather, the Fed is pursuing this policy because there are a lot of banks out there that they are worried about.

The three month Libor rate has remained high, indicating that banks remain worried about the credit worthiness of various institutions around the world.  See the chart below.

We closed 16 banks in May so far, with 73 so far this year according to the FDIC.  There were only 36 bank failures through May of 2009.  While there were 140 bank failures in 2009, we are on track (based on a simple extrapolation of existing trends) to experience about 180 bank failures in 2010. 

We finally have updated gross charge-offs data, and 2010 quarter 1 was $57 billion.  Gross charge-offs were $57 billion in 2009 quarter 4 as well.  This is an alarming number.  Typical gross charge-offs run around $10 billion, this is the average from 1999 quarter 1 through 2007 quarter 4.

The three month Libor rate has been rising steadily since mid-March of this year, indicating that banks are becoming increasingly worried about the credit worthiness of various institutions around the world.  See the chart below here.

We have maintained here in our columns and in our publications that risks to economic growth continue, and these data are part of why we hold this view.

We’ve seen a lot of Bank failures since September 2008. By Friday October 23 there have been 106 bank failures thus far in 2009, the most since 1992. However, the composition of the failures has been changing from large financial institutions to small banks. A key factor driving the compositional change is commercial real estate, which remained relatively healthy through the first three quarters of 2008, but has gradually been pulled into decline by the rest of the economy. The weight of joblessness, falling retail sales, and unwanted office space has driven commercial real estate to historically high vacancy rates and depressingly low net absorption rates.

While small banks were not highly exposed to securitized residential mortgage risk, they appear to be more exposed to commercial real estate and business loans secured by commercial real estate. Given that commercial foreclosures have not yet peaked we expect that more bank failures will occur during the next 12 months, with small banks leading the parade. As this market evolves, it will likely contribute to weak credit availability on Main Street.