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Community, Regional Banks Lead -- But Shouldn't!

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Continued problems in the banking system don't justify their gains.

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Editor's Note: This article was written by Richard Suttmeier, chief market strategist at ValuEngine.com, which is a fundamentally-based quant research firm in Princeton, New Jersey, that covers more than 5,000 stocks every day.


The America's Community Bankers' Index
(ABAQ) is up 9.8% year to date, but this group of more than 500 smaller banks will be the source of some of the 150 to 200 banks that will fail in 2010. ABAQ doesn't deserve to be at a 52-week high. Note the extreme overbought condition on the daily chart.



The Regional Bankers Index
(BKX) is up a whopping 17.2% year to date, which isn't justified by the growing number of toxic assets and notional amounts of derivative contracts on the books of our nations largest banks. The BKX is also at a 52-week high with an extreme overbought condition.



The Number of FDIC-Insured "Problem" Banks Jumped 27% to 702 in the Fourth Quarter of 2009

In 2008 there were just 25 bank failures. In 2009 there were another 140. So far in 2010 through March 5 there have been 26 bank failures bringing the total to 191 since the end of 2007.

The FDIC Deposit Insurance Fund ended 2009 in arrears by $20.9 billion, the second quarter deficit in a row. The last time the fund was negative was in 1992. With the 26 bank failures so far in 2010, my estimate is that the fund deficit is now $25.6 billion. When you consider the $46 billion in pre-paid insurance fees for 2010 through 2012 the fund is in the black by $20.5, which in my judgment isn't enough to get the FDIC through 2010.

The FDIC didn't add the $46 billion directly into the fund and will recognize the prepayments into the fund's equity balance over the next three years as each year's assessment is recorded.

The FDIC expects bank closures to increase in 2010, but they reiterate that all insured deposits are safe. Insured Deposits ended 2009 at $5.4 trillion up 13.5% for the year or $641 billion. The increase is attributed to the increase to $250,000 per account for the FDIC guarantee. This is scheduled to return to $100,000 at the end of 2013, but I predict that the new ceiling will be made permanent. At the end of 2007 Insured Deposits were $4.3 trillion, so the increase has been $1.1 trillion or 25.6% during "The Great Credit Crunch."

Meanwhile, the Deposit Insurance Fund declined from $52.4 billion at the end of 2007 to minus $20.9 billion at the end of 2009, a decline of 140%. Here's the problem: The DIF fell below its 1.15% of Insured Deposits in June of 2008 and under current law must be funded back to that ratio by the end of June 2013, which seems next to impossible without tapping the $500 billion temporary line of credit with the US Treasury. At today's level of deposits, the fund would have to be about $62 billion. Assuming the growth of the past two years the fund may have to be $84 billion.

In my opinion the remaining money in the TARP should be deposited in the DIF to ease the stress in the banking system.

No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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