Sunday, October 19, 2008

Recession or Depression? It Might Depend On Where You Live

In a recent post, I found that the banking crisis was far from uniform within the U.S.. Many small communities continue to boast strong banking institutions, even as larger cities that experienced residential and commercial real estate booms host banks with lesser safety ratings.

As a follow-up to that theme, I went to the Bauer Financial site and looked up the number of "troubled" banks as a function of their state locations. Bauer awards up to five stars for bank safety, based on CAMELS criteria (capital adequacy, asset quality, management quality, earnings, liquidity, and sensitivity to market risk). They recommend banks with four and five stars; those with two stars and below pose safety concerns.

What we see in the chart above is that the number of troubled banks, broken down by the number of stars, is much higher in the states that experienced real estate booms (Florida, California, and Georgia) than in states that experienced less exponential growth (New York, Kansas, Wisconsin).

Out of 313 banks in Florida, 37 had ratings of two stars or less. The ratio was 28 out of 312 banks in California and 65 out of 358 in Georgia. Across the three states, about 13% of banks qualified as troubled as of June 30, 2008. (One can only surmise the proportions would be higher today).

Conversely, in New York, there were only 7 out of 198 banks with two or fewer stars. That ratio was 11 out of 353 for Kansas and 7 out of 293 for Wisconsin. Across these three states, only about 3% of banks qualified as troubled.

The financial health of banks is intimately tied to the financial well-being of communities. Banks that cannot lend due to capital constraints cannot fuel an economic rebound. Banks also reflect the health of the communities around them. Home owners, real estate developers, and businesses that cannot pay off loans will also be constrained in their ability to spur an economic comeback.

In many areas of the country, the current economic crisis may look and feel like an unpleasant recession. In other areas, it could feel much worse, with depressed housing and business growth for some time to come. The regions with the greatest credit booms are feeling the brunt of credit contraction; how bad the economy gets could depend very much on where you live.