The Risk Professional: First Friday in 2011,First Commercial, First Failure in US banking sector

The First Commercial Bank of Florida is the latest of hundreds of banks to collapse or be closed by regulators in the USA in the past three years. It has the ignominious fame of being the first bank closed on the first Friday (it's always a Friday) in 2011. Its story is the same as most of those: it was not required to put in place Basel II ratios because, under the Bush / Greenspan regime it was decided that only the biggest banks need do so.

That meant that the USA's smaller banks did not have to maintain sufficient distance between deposits and lending which, in somewhat dubious code, they call "assets."

There is a pattern: amongst the almost 200 banks that failed in 2010, the vast majority had very little surplus of deposits over lending. As defaults rose and repossessions were liquidated at less than the outstanding value on loans, small banks suffered still weaker balance sheets. Then their credit lines dried up. Worse, depositors stayed away, paying down loans or simply running out of money as unemployment leeched away their capital.

These are the primary factors that were supplemented onto bad lending policies, positively encouraged by the Fed and the US Treasury through the early years of the 2000s.

While the world fascinates itself with the collapse and sporadic rescue of mega-banks, the failure of the US banking sector as a whole is a genuine risk. After all: AIG's failure was due, at its heart, to its insuring of the "assets" of the smaller banks, albeit indirectly. That pass-through risk has never been properly identified and questioned as to future management.

First Commercial Bank of Florida fits the pattern: as of 30 September, 2010, First Commercial Bank of Florida had approximately USD598.5 million in total assets and USD529.6 million in total deposits. That is too close for comfort.

But it's not just the deposit - assets ratios that causes concern: financial institutions are businesses of reputation and that reputation is represented by their brand. Like almost all the disposals of failed banks in the past three years, the brand will disappear when the failed bank is subsumed into its rescuer - and no premium is paid for the deposits which is a code for saying the acquiring bank places no value on the goodwill of the failed bank.

Yet brand values and goodwill feature heavily in the balance sheets of many companies including financial institutions.

Take out brand values / goodwill and many, many more US banks are insolvent on a balance sheet test.