Thursday, March 27, 2008

FDIC Thinks Bank Failures Coming

Yeah, it's a double-post day. I just spotted this on Calculated Risk. The AP is reporting that the FDIC is staffing up for an anticipated rush of bank failures.

The Federal Deposit Insurance Corp. wants to add 140 workers to bring staff levels to 360 workers in the division that handles bank failures, John Bovenzi, the agency's chief operating officer, said Tuesday. ...

There are 76 banks on the FDIC's "problem institutions" list — which would equate to about 10 expected bank failures this year, though FDIC officials declined to make projections. Historically, about six banks fail per year on average, FDIC officials said.

Since 1981, total failures per year averaged about 13 percent of the number of institutions that started the year on the agency's list of banks with weak financial conditions.

Now here's a topic that I'd like to see Chris Larsen address in one of the monthly marketplace summary commentaries. He's been very upbeat about otherwise ugly financial events, and I do have to admit that there is a good "cup-is-half-full" for Prosper in this otherwise troublesome bit of financial fortune telling. I'm sure it'd go something like this:

The recent turmoil in the banking sector has provided great opportunities for Prosper lenders. As the number of banks shrink, borrowers should be more willing to look toward Prosper for loans, seeing how they have so few other alternatives.

The other thing to note is that Prosper, being a marketplace instead of a traditional bank, will most likely not be brought down by the banking implosion. For good or bad, Prosper is a conduit that directly transfers the borrower's risk to the lenders, bypassing itself (this is why it's important for lenders to lend conservatively). As long as Prosper can make borrowers appear and find some return-hungry lenders, they'll survive. And I do believe that more borrowers will appear as banks tighten up their lending standards.

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