Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Disclaimer: The Parliamentary Library does not warrant or accept liability for the accuracy or usefulness of the transcripts. These are copied directly from the broadcaster's website.
Hundreds of US banks face collapse -

View in ParlViewView other Segments

Hundreds of US banks face collapse

Sue Lannin reported this story on Friday, August 28, 2009 12:10:00

BRENDAN TREMBATH: There's a new measure of the tremendous burden on the US banking system.

The number of problem banks has risen to 416, the highest level in 15 years.

There are predictions that hundreds of banks could fail in North America over the next few years as
bad debts work their way through the system.

Finance reporter Sue Lannin.

SUE LANNIN: The US economy appears to be off the critical list but it's still on life support.

Government programs like the cash for old cars scheme and carrots for first home buyers limited the
fall in production in the June quarter.

GDP shrank 1 per cent on an annual basis, far less than the 6.4 per cent fall in the March quarter.

David de Garis is senior economist at the National Australia Bank.

DAVID DE GARIS: We saw really big contractions in GDP in the December and March quarters of this
year when businesses in the US and elsewhere took big steps to reign in production and now we're
seeing some stabilisation.

SUE LANNIN: But unemployment still remains high?

DAVID DE GARIS: Oh absolutely; the unemployment rate is 9.5 per cent and the administration there
expect that it's going to get to 10 per cent.

SUE LANNIN: And as unemployment rises more people are expected to default on their bank loans.

Sheila Bair, the head of the independent banking insurer the Federal Deposit Insurance Corporation,
says toxic debts are spreading through the system.

SHEILA BAIR: The early losses were related to residential loans and complex mortgage related assets
where the crisis really began. We're now seeing problems with more conventional types of retail and
commercial loans that have been hit hard by the recession.

These credit problems will outlast the recession by at least a couple of quarters.

SUE LANNIN: The pain is being felt at the 416 problem banks identified by the FDIC, about 5 per
cent of the country's insured financial institutions.

The number of troubled lenders jumped by one-third in the June quarter as bank losses hit more than
$4 billion. That meant the FDIC had to put aside more money to cover potential failures.

Sheila Bair says there is more pain to come.

SHEILA BAIR: In many important respects financial markets are returning to normal. Combined with
the positive economic news in recent weeks we're hopeful that this will lead to a moderation in
credit problems in coming quarters.

But as our report shows, cleaning up balance sheets is a painful process that does take time. We
expect the numbers of problem banks and failures will remain elevated even as the economy begins to

SUE LANNIN: Eighty-one banks have gone under so far this year.

Alex J Pollock spent 35 years in the US banking industry. He's a fellow at the American Enterprise
Institute and believes more banks will fail.

ALEX J POLLOCK: We're in the middle of a truly big financial bust in this country as of course in
other countries, so to think that 5 per cent would be considered problem at this stage where we've
had such a large first real estate bubble and then real estate bust is not surprising.

I think it wouldn't at all be surprising over the next few years in the aggregate to see several
hundred bank failures in this country.

SUE LANNIN: Charles Geisst is the author of Collateral Damaged which looks at the spread of
consumer debt from Main Street to Wall Street. He thinks the bad debt blues aren't over yet.

CHARLES GEISST: The assumption was about a year ago that the banking crisis was confined to the
larger banks because of their holdings of toxic securities and that the smaller banks didn't have
that problem so they would be immune to this crisis.

But as it turns out they're being affected mostly by bad loan portfolios. So in other words the
same sort of bad loans which infected the securities, the mortgage backed securities to begin with,
is obviously residing on the books of the small banks.

BRENDAN TREMBATH: Charles Geisst, professor of finance at Manhattan College in New York.