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Thursday, 20 August 2009

More Banks to Fail, and That's Good

Reading - More Banks to Fail, and That's Good -http://www.cnbc.com/id/3248...

U.S. banks will continue to fail at a steady rate over the next two years, and that's not necessarily a bad thing, former FDIC Chairman Bill Isaac told CNBC.

Isaac, who presided over one of the most tumultuous periods in banking history during the savings and loan crisis of the 1980s, said there remains a large amount of contagion in the system that needs to be removed.

"It's cleanup time," he said during a live interview. "For the next couple of years we will continue to have a steady flow of banking failures. I'm not expecting anything we can't handle or extraordinary in terms of size, but we will see a steady diet of bank failures over the next two years."

Bank failures have come amid a lack of liquidity that began with the collapse of the subprime mortgage business.

Five banks have failed in the past week, bringing the 2009 total to 77, according to the FDIC. The number pales to the situation during the S&L crisis, when the nation lost 3,000 institutions.

Click here for video of Isaac's full comments
"The (dollar) numbers are bigger today because everything's bigger today," Isaac said. "I don't think the failures are any larger today proportionate to the economy."

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In fact, he said getting banks to the point where they are seized by the FDIC is a critical step to making sure the system functions properly.

"I would say the bank failures are not necessarily a bad thing,"" Isaac said. "When a bank fails we've got a deeply troubled institution that cannot lend money. If we go in and resolve the failure, the cleanup of that situation ... will enable the institution to get on with lending. The FDIC cleans out the problem loans. So it really does cleanse the system and help us get lending started again, which is what we need."