Accessibility links

Analysts Caution US Banking Crisis May Not be Over

Some U.S. banks began repaying billions of dollars in government bailout funds and are urged to help the US with economic recovery

Some U.S. banks began repaying billions of dollars in government bailout funds and are urged to help the US with economic recovery

After receiving billions of dollars in government bailouts, U.S. banks are under increasing pressure to start lending money again. With banks paying back emergency government loans faster than expected, President Obama is reminding bank executives that it is their turn to help the U.S. economy. But as 2009 comes to a close, some analysts warn the banking crisis is far from over.

As U.S. banks repay billions of dollars in government bailout funds, President Obama held meetings with top bank executives in December, telling them it is time to return the favor.

"The way I see it, having recovered with the help of the American government and the American taxpayer, our banks now have a greater obligation to the goal of a wider recovery," President Obama said.

But the president may be giving the financial sector too much credit.

"It was in a free fall and it was a very scary period," said economist Martin Neil Baily said. Baily is an author and former adviser in the Clinton administration, says after the failure of Lehman Brothers towards the end of 2008, many of the world's largest banks feared the worst as the collapse of the housing bubble exposed investments in risky subprime loans.

"The banks that came closest were Citibank, Bank of America and if those had not been supported by the government, I think it might have caused a cascading crisis that would have been much worse than the one we actually had," Baily added.

Although he says the worst is over, Bailey says the banking crisis is not.
More than 130 US banks failed in 2009, the most since 1992. He predicts high failure rates for smaller, regional banks in 2010 as commercial real estate loans come due.

"So there may actually be a worsening of credit availability to small and medium sized business in the next year or so," Bailey said.

Analysts say the biggest problem is high unemployment, which weakens demand and makes banks reluctant to lend. But US Bankcorp chief Richard Davis sees the situation differently.

"We're probably more optimistic than the pundits might be," Davis said. "With that in mind, we're putting everything we can, it's the coal to our engine, lending is what we do. And so we want to make more loans. We have to find a way to qualify more people and not put ourselves at risk."

While some economists predict continued recovery in 2010, Baily says the only certainty is that banks are unlikely to make the same mistakes - twice.

"You know, forecasting's become a very hazardous business so I don't want to commit myself too much. I don't think we know exactly what's going to happen but it's certainly possible that we could get very sluggish growth over the next year or two and possibly even growth could stall out if it doesn't get underway," Bailey said.

If the so called "double dip" scenario happens, in which the economy starts to shrink again, Baily says it would make a strong case for a second stimulus -- something the Obama administration hopes will not be necessary.