The bankruptcy is waiting for many American banks

Some players from the international financial market sustain that in the subprime credit crisis, what was worse passed away. Others say that this has already ended. There are also opinions not by far so optimistic, which say that the bankruptcy of many American banks is expected from now on, the international financial crisis being far of having ended. These are expecting new negative effects of the crisis, which although haven’t manifested till now, they won’t delay to show up.

The President of Federal Deposit Insurance Corporation (FDIC) from United States, Sheila Bair, recently stated that the banking bankruptcies associated with the depreciation of the real estate market from USA will involve also bigger credit institutions, Reuters announces. A number of banks, bigger every day, deal with exposure to the conditions in deterioration from the real estate commercial market, respective from the area of the mortgage credits. The incertitude of the economic environment continues to represent a challenge for the banking industry, the institutions of regulation the banking market and for the owners of real estate assets from United States of America (USA).

Bankruptcy at horizon

Starting with January 2008 and till now, four American banks with deposits guaranteed by FDIC failed, in comparison with only three banking bankruptcies during 2007. FDIC, which administrates a fund for assuring the deposits of about 52,8 billion dollar, has reviewed its calculation method of the risk ratings for the big banks, in order to be sure that reflects the conditions of the new economic environment. Last week the Corporation has extended the list of the banks with problems to a number of 90 credit institutions, owners of some total assets of 26 billion dollar, planning to focus on the way in which the banks administrate their risks concerning the liquidities and the banking investments in the structured loaning products. More then that, The Wall Street Journal quotes Joseph Mason, associated professor for finance to University Drexel. In base of the study of the previous financial crisis, this forecasts a bankruptcy wave for the banks affected by the mortgage credit crisis. Moreover, the analysts of the investment bank RBC Capital Markets estimate that in the next two-three years, at least 15 American banks will enter in incapacity of payment. And if the USA economy will enter in a recession comparable with the one of ‘80s or ’90s, the number of the banks that will enter in bankruptcy can reach to 300, according to RBC Capital Markets study.

„Texas rate”

The RBC Capital Markets experts have developed an index which will warn early the banks with problems regarding liquidities. The index, named” Texas rate”, is calculated by reporting the inefficient credits (inclusively the ones on three months) to the capital easy accessible of the credit institution, to which adds the money saved for the future loans. Mainly, the „Texas rate” outlines the credits with problems as a percentage from the capital which a bank has available. The ones who set up the „Texas rate” have inspired from the situation of the banks from Texas during the economic recession which took place in the ’80s in USA. So, although USA confronted with a recession period, many banks from Texas were considered the most solid from the country. However, when the assets problem turned up, the perspective on the Texan banks has radically changed. After the problematic assets have exceeded the capital of the credit institutions, most of the Texan banks entered in bankruptcy. With a similar situation has also confronted the banking system from New England during the economic recession at the beginning of ‘90s, The Wall Street Journal writes.

Citi, Merrill and UBS expect for massive looses

Citigroup Inc., Merrill Lynch & Co. and UBS AG can lose till 10 billion dollar from the bonds ensuring, after MBIA Inc. and Ambac Financial Group Inc. have lost the maximum rating quotes that credited them, Bloomberg quotes a financial analyst of Oppenheimer & Co. MBIA and Ambac are the biggest bonds insurers of the world. Standard & Poor’s have reduced their initial ratings of AAA with two levels at the beginning of June, thing that is equivalent with the depreciation of the ratings of some financial titles of over one thousand billion dollar, guaranteed by those two institutions. The decrease of the ratings can limit the capacity of the insurers of selling new policies and so can put an additional pressure on their incomes. Citigroup, the biggest bank from USA and Merrill, the biggest broker at world level, had suffered as a result of rating depreciation for the financial titles assured by MBIA and Ambac. Also, the Swiss bank UBS, the most affected European institution by exposure to the financial titles associated to the subprime credits, can record new substantial wastage as a result of rating depreciation of those two titles insurers. At the end of March, current year, UBS had an exposure of 6,3 billion dollar in bonds assured by MBIA and Ambac. In their turn, Citigroup and Merrill confront with exposures of 4,8 billion dollar, respective 3 billion, Bloomberg adds.

The necessity of larger reserves

The currency examiner John C. Dugan stated last week that the increased volume of losses in the businesses with real estate capital shows the need of some bigger reserves and the necessity of returning to more severe standards regarding the subscriptions from the mortgage capital market from USA. The office of the currency examiner is one of the regulation institutions from the banking market from United States. According to the statements of the currency examiner, carried on last week at the Round Table of the financial services near the Council of the real-estate policies, the loans and mortgaged credit lines have „dramatically” increased in the last years in USA, with more then 100% from 2002 till now, reaching to 1.100 billion dollar. The factors which contributed to the increase of the mortgage credits were the fast increase of prices for houses, fiscal facilities and low rate for interests, but also the liberalization of standards of subscription for mortgages.

The list of some serious checking of assets and incomes of the ones which have taken housing credits, the big level of indebt allowed and granting mortgaged credits without the compulsoriness of ensuring the mortgage has determined more and more Americans to afford financings with higher values every day. However, when the credits have become inefficient, it turned up the evidence of some bigger reserves in order to help the banking institutions to get over the situation. Despite all these, John C. Dugan estimates that the credit institutions are incapable of establishing the optimum value of the reserves that must be ensured for the mortgage loans. The new structures of the credit products, the relaxed conditions for the mortgage subscriptions, the price of the houses in decline and the potential changes of the consumers behavior determine that the future of the mortgage credits to be difficult predict.

A new mortgage crisis in USA

BusinessWeek announces hundreds of thousand of options for mortgages with adjustable rate will be prescribed till April 2009. With an American economy already affected, some experts draw the attention that a new wave of prescribing mortgages will hit USA, the peak following to be touched the next year, in April.

Hundreds of thousand of Americans, which have chosen mortgage with adjustable rate in order to obtain a loan, will face monthly rate higher every day, which they won’t be able to pay anymore and they’ll be forced so to prescribe their mortgages. About one million debtors have chosen till now mortgages with adjustable rate, but till now just a small part faced the impossibility of paying their monthly rates.

The mortgages with adjustable rate offer to the ones which want to buy a house, loans with small rates in the first period of the contract and then, after several years the level of the rates increases significantly. Many of the ones that have taken this type of mortgages thought that they can resell their houses, before that the level of the interest rates to exceed their capacity of payment.

This didn’t happen and there were many cases in which the loaners of mortgages practically become bankrupt. The Mortgage Bankers Association from USA has already announced, in June 5, that the mortgages with adjustable rate are becoming a problem, BusinessWeek announces.

The national rate of prescribing mortgages reached in USA to 1,55% in the first quarter of 2008, compared with 0,53% in the same period of 2007. Moreover, the bankers expect that the non payment rate for the mortgage credits to increase more in 2009. The mortgages with adjustable rate were initially conceived for the free-lancers, with variable incomes. However, they won popularity and also among the others social categories during the development without precedent of the real-estate market from USA in 2004. The high prices for the houses at that time made many Americans who in those conditions would have been impossible, to afford a mortgage.

Mortgages with adjustable rate

A mortgage with adjustable rate is a mortgage loan characterized by a rate of interest periodically adjusted in base of some indexes. Among these there can be noticed the Cost of Fund Indexes (COFI), the Constant Maturity Treasury Index (CMT), The London Interbank Offered Rate (LIBOR). A few credit institutions use their own financing costs as point for establishing the credits cost, in this way making sure that the rate of profit for credit granted doesn’t decrease, no matter of the conditions from the international financial markets.