270 US banks closed down since 2007

Friday evening, July 23, 2010, the FDIC announced seven more bank failures, bringing the totals to 103 so far this year and 270 since 2007. The seven banks closed this week had collective assets of $2.16 billion and deposits of $2.02 billion, reports Commodity Online.

Their closings cost the FDIC an estimated $431 million, about 21 per cent of deposits. So far this year, bank closings have cost the FDIC an estimated $18.55 billion.

Five of the seven closings were accomplished with the FDIC entering into loss-share agreements with the acquiring banks. That means, in effect, that the FDIC makes a guarantee to the acquiring bank that assets it has taken over from the failed bank will not decrease in value beyond a pre-agreed limit.

In connection with those five closings this week, the FDIC entered into loss share agreements covering an additional $1.25 billion in assets. So far in this crisis, the FDIC has entered into loss share agreements covering about $180 billion.

Loss share agreements save the FDIC money at the time of the closing, because the FDIC does not have to pay the acquiring bank as much money up front to honor the failed bank's deposits. However, a loss share agreement is by nature a bet.

The FDIC is betting that over the next ten years, the failed bank's assets will turn out to be worth more than any party was willing to bid for the assets at the time each bank was closed. Future asset values are calculated net of selling expenses, meaning that things like foreclosure costs, property taxes, utilities and maintenance fees paid by the acquiring bank in disposing of the assets is deducted from their eventual sales price.

This is why it is important to keep track of the total value of assets the FDIC has guaranteed under loss share agreements throughout this financial crisis. It is similar to keeping track of the total dollar value of mortgages guaranteed by Fannie Mae or Freddie Mac. The two major distinctions are that the FDIC's assets under loss share are, by definition, distressed assets and their value has already been significantly discounted.

The FDIC's future exposure lies in the possibility that these assets may turn out to be worth even less than the discounted value agreed to at the time of each bank failure.