The Institutional Risk Analyst released its preliminary Q4 Bank Stress Ratings and they are not showing any imrpovement, quite the contrary.

As of yesterday there were CALL reports from 7,287 FDIC insured banks which have been processed and released to the Central Data Repository. (…)

Based on the bank CALL reports submitted and released so far, the IRA Bank Stress Index (BSI) is now at 8.0, a significant increase in visible stress from the preliminary rating of 7.4 in Q3 2009 that we published in The IRA on November 10, 2009 ("Preliminary Q3 2009 Bank Stress Test Results; Looking for OTC Derivatives Reform").(…)

IRA Preliminary Bank Stress Index (BSI) Grade Distributions — Q4 2009


The reasons behind the big difference between the Q3 2009 preliminary BSI rating of 7.4 and the final Q3 BSI score of 4.44 for all 8,300 plus FDIC insured banks are several. First the preliminary BSI score excludes thrifts and mutual savings banks, which tend to be much more conservative than the average bank. For reasons understood only in Washington, the Office of Thrift Supervision will not release thrift data until the FDIC press conference at quarter end + 55 days and will not release to the public maturity data on thrift loan portfolios at all.

The preliminary BSI score also excludes the largest bank units, which as a group tend to be released near the end of the reporting cycle for reasons relating to investor relations and have better scores than the aggregate ratings for their consolidated group. For example, the largest bank CALL report released by the FDIC so far is the $97 billion asset Citibank South Dakota, the credit card specialization unit of Citigroup (C).

The Q4 2009 preliminary score for Citibank South Dakota is now over 30 vs. 23.7 in Q3 2009 (1995 = 1) or an "F" letter rating on the IRA BSI scale. The aggregate score of C was 21.9 in Q3 2009 and also rated "F" on the BSI. High loss rate credit card specialization institutions such as Citibank South Dakota or Department Stores National Bank, another C bank unit which shows a preliminary BSI score over 60 based on Q4 2009 preliminary results, tend to pull up C’s overall stress score. While C itself was a 21 in Q3 2009 or an "F" letter grade on the BSI scale, the lead unit, Citibank N.A. had a slightly lower stress score.

The other reason that the final BSI score for the entire universe of FDIC insured banks tends to finish well-below the preliminary score generated by IRA is that there are hundreds of non-operating trusts in the FDIC reporting universe, entities that have insurance certificate numbers but do not operate as full blown banks. These entities tend to pull down the visible BSI score for the entire industry by virtue of sheer mass of assets.

What all of this tells you is that the operating bank units in the US were under higher levels of stress in Q4 2009 than at any time in the post WWII period. The BSI preliminary score for all US banks of 8 is almost a full order of magnitude above the 1995 benchmark year and twice the level for the entire universe of FDIC insured banks in Q3 2009.

While some 85 percent of the banks are represented in the preliminary results for the BSI. only half of industry assets are included, but this still paints a grim picture for the real economy in terms of credit availability from community and small regional lenders. If these levels of stress are maintained as we go through 2010, then look for the banking industry to continue shrinking assets and loan books, and for the number of bank resolutions to continue to climb toward our long-standing estimate of 1,000 bank failures through the cycle.

Call the collapse of New Century Financial the starting point of the lost decade but also know that the cause of the crisis, namely the closed monopoly marketplace for OTC securities and derivatives run by the largest banks and protected by the Fed, is alive and well, and calling the shots in the halls and lobbies of the national Congress.


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