This US bank failure just triggered another huge shockwave to the fragile banking system

The torpedoed US banking system remains in intensive care with life-support from the Federal Reserve keeping it just out of danger, but recovery still remains elusive and a long way off.

For a while now, the government through the Federal Deposit Insurance Corporation (FDIC) has maintained a list of "problem" institutions to assess the extent of the risks in the banking system. The FDIC is the banking regulator that insures customer deposits, helps find buyers for failing banks and liquidates collapsed banks. It insures 8,195 institutions with assets of US$13 trillion and collects insurance premiums from every licensed bank to protect customers' deposits up to US$250k in the event a bank fails. It gets no funding from the government. Banks pay premiums to the FDIC determined by the number of customer deposit accounts they service.

On June 30, 416 banks with assets of US$299bn (compared with 90 at end of March 2008 with assets of US$26bn) were on the problem list. These have failed the FDIC's criteria for asset quality, liquidity and earnings. Up to the week ended 2 October, 95 banks have failed in 2009.

Last week, an alarm bell went off. Georgia Bank, Atlanta's second largest bank with assets of US$2bn collapsed. It was not on the list.

This has sent another huge tremor to the banking system and three key questions emerge from this episode:
- there must be a serious flaw with the FDIC methodology...why and how were Georgia Bank's assets so radioactive their value evaporated rapidly escaping FDIC scrutiny
- with mark-to-market accounting suspended since April, no transparency exists with determining the fair value of bank assets and is this the proof regulators have now lost their grip with understanding any bank balance sheets
- just how stressful were the government's fanfare "stress tests" for the big banks completed in May given the complexity of their assets

With a another strong typhoon brewing off the coast, just because one can feel the first effects of the wind and cannot see it, so this is no reason to disregard the intensity of the typhoon when it makes that landfall.

Today, the FDIC is technically bankrupt as it's DIF [Deposit Insurance Fund] balance has fallen from US$52.8bn in March 2008 to negative. It has proposed to borrow forward three years' deposit insurance from its member banks to raise US$45bn. Another massive potential hit to the banks' earnings! Alternatively, there is a credit line from the Treasury for US$100bn approved by Congress in May which it can tap as a last resort. This will leave the poor taxpayer on the hook again with another bailout.