The Risk Professional: US regulators continue to close small banks

Four more small banks have been closed by regulators in the USA. The most striking fact for almost all of the banks closed this year has been the close correlation between their "assets" and "deposits."

This is one indicator that the balance sheets were insufficiently strong - and shows how much the banks were dependent on inter-bank lending for day-to-day survival.

As the USA plans to pump in another USD700,000 million dollars in what has come to be known as QE2, there is no sign that the new money will reach this sector or its customers. In fact, the plan is to do exactly the same as before despite the clear evidence that the previous round reached big business and did little or nothing for the vast majority of banks, other small lenders and ordinary businesses.

The sales also show the fallacy of including "goodwill" or "brand value" in balance sheets.

When banks are taken over, no premium is paid for deposits. And in the vast majority of cases, no premium is paid for "assets" despite the fact that - in theory at least - they are supposed to give a return on investment.

When a premium is paid, only in very isolated cases is that premium as much as one per cent.

And yet, under the USA's GAAP, banks and other businesses are entitled to put a brand value or goodwill item into their balance sheet.

That, as the evidence from the failed banks lists shows, is a fiction: and that fiction translates into what may be ruthlessly termed false balances sheets.

Indeed, cynics might say that weak balance sheets can be shored up by inserting a brand value figure that meets the weakness.

Details of banks closed on 5th November and previously this year can be found at our sister site at BankingInsuranceSecurities.Com