According to the FDIC, there were 44 banks on the problem bank list in the third quarter of 2023, and the agency expects that number to continue to climb in 2024. As such, the FDIC announced in its 2024 budget that it is increasing its examination staff to include 189 new positions. The increase is not only due to the projected rise in problem banks but also in response to three significant bank failures in 2023.
These failures were primarily brought on by liquidity concerns around bank stability from severely decreased values of bank security portfolios and inadequate equity to absorb the hit. The rapidly increasing interest rates in 2023 led to publicly traded banks with more than $20 billion in assets having tangible common equity ratios (adjusted for fair value adjustments on held-to-maturity instruments such as loans) of less than 3% as of September 30, 2023, according to S&P Capital IQ.
Coupled with the rise in interest rates, bank analysts and several large banks have advised caution regarding commercial real estate loan exposure from increased vacancy rates post-COVID. These analysts have observed increased net charge offs, primarily in non-owner occupied commercial real estate properties.
Should we panic? Absolutely not, as the industry continues to be very well-capitalized. However, several banks have announced their desire to acquire banks from the FDIC. The FDIC bid process is highly confidential and typically operates within a short window before the FDIC officially closes a bank and declares a successful acquirer.
