America’s Quiet Banking Collapse

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America’s Quiet Banking Collapse

Seven more banks fade into history.

The Federal Deposit Insurance Corporation (fdic) announced that it had seized the assets of seven additional banks, on Friday. During 2010 so far, 103 banks have gone bankrupt, putting the nation on pace for the most bank failures since the Savings and Loan crisis during the 1990s.

America’s quiet banking collapse may be one of the most underreported stories of the year.

If the rate at which banks continue to fail continues, 175 institutions will become wards of the state by the end of December. In 1992, during the height of the banking crisis, 179 banks were shut, so this year could be a record—of the bad kind.

One difference between 1992 and today is that banks that are failing now are bigger and more interconnected. Hence the determination by the fdic to keep a low profile. When banks do fail and are seized by regulators, the press is only notified as it is heading into the weekend doldrums, as was the case this Friday.

But going forward, the increasing numbers of bank failures may become more difficult to hide.

At the end of 2008, there were 252 U.S. banks on the fdic’s problem list, according to analyst Michael Snyder. At the end of 2009, there were 702 U.S. banks on the fdic’s problem list.

As of today, there are now 775 banks on the problem list—that is about one in every ten! Three months ago, there were only 702 problem banks. And the list might have been even worse had the government not made accounting rules less stringent.

But the fragility of the system is worse than most people understand.

The approximately 8,000 banks that operate in America have about $13 trillion in deposits. But guess how much money the fdic has on hand to insure those deposits?

The answer is worse than zero! The fdic is completely broke and is operating in the red, even though banks are still paying their premiums for coverage. As of the end of the first quarter of this year, the fdic was $20.7 billion in the hole.

The next question is: Who is going to bail out the fdic?

The government you say? That is all fine and good, but the government is doing a lot of bailing out these days. In fact, it may have already bailed out too much. If that is the case, who is going to bail out the government?