Since September 25, 2008, about 279 banks have collapsed. This is the largest number in 20 years. This is causing “the eliminated jobs, accelerated a drought in lending and left the industry's survivors with more power to squeeze customers” reads the Wall Street Journal. Nobody seems to really know to what extent such bank failures will affect the overall economy on the country. “The Federal Deposit Insurance Corp. already increased its number of problem banks by 6% to 829”(WSJ).
The only hope here appears to be if the Federal Reserve decides to stimulate the economy. Although to this economist argue that will only worsen the condition due to the fact the help usually goes to the big bank which inevitably kills the completion. “Large banks like Countrywide Financial Corp. and Wachovia Corp. were acquired to avert failure while powerful banks including Citigroup Inc. and Bank of America Corp. were propped up by the government” (WSJ).
Here are the pros and cons of the situation,
Pros:
• This could become a healthy cleansing of a sector that grew too fast
Cons:
• A number of U.S. banks could fall to 5,000 over the next decade from the current 7,932
• A weakness in real estate continues to constrain economic growth
• There a many lost jobs
• Failed bank assets are now strewn across the banking system
The bottom line is, the current economic problem is feeding on itself. Companies can´t take loans from banks to acquire assets and reinvest in the bank because the bank reduced amount of assets impairs them from making loans. As Richard Bove, a bank analyst at Rochdale Securities in Lutz, Fla said: "If you reduce the amount of assets at a bank, it means they make fewer loans, and that has a negative impact on the economy" (WSJ). The only two possibilities that I see this ending up are: 1.- The Fed intervenes or 2.- the industry will collapse living only the big players to rip off the benefits of underpriced assets.
References:
http://online.wsj.com/article/SB10001424052748704760704575516272337762044.html
Hopefully we will see this trend reverse soon. A recovering economy could give consumers more confidence, which will increase the demand for financial services such as credit cards. This is important to the recovery of consumer banking industry as a whole.
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