For Banks in 2008, a Recession Gloomed
(This article originally appeared in a special issue of BankWatch, Mercer Capital's monthly complimentary e-mail newsletter. For more information on BankWatch, see page 4.)
As the world hoped to return to normalcy after a turbulent 2007, 2008 proved to be a worse year for bankers. A credit crunch and housing collapse maintained the downward pressure on stock prices that began in 2007. 2008 saw the closure of 25 banks nationwide, and the overall banking industry has struggled with deteriorating asset quality and liquidity concerns. In order to gauge the impact of the 2008 financial institution market trends on smaller institutions, Mercer Capital conducted a study of two asset size based bank indices: banks with assets between $500 million and $1 billion (referred to hereafter as the "Small Community Bank Group") and banks with assets between $1 billion and $5 billion (the "Large Community Bank Group").
The banking industry made headlines throughout the second half of 2008. The struggles of Freddie Mac and Fannie Mae necessitated nationalization of the two government-sponsored enterprises, and the failures of IndyMac Bank and Washington Mutual Bank fueled the erosion of confidence in the banking industry. Furthermore, the acquisitions of Merrill Lynch by Bank of America and Wachovia by Wells Fargo signaled consolidation in the banking industry in order to survive the economic uncertainty.
In an attempt to provide assistance to the banking industry, the government developed several programs to improve banks' asset quality and capital positions. Under the Emergency Economic Stimulus Act of 2008, the Troubled Asset Relief Program ("TARP") was developed with the intention of cleaning up the balance sheets of banks by removing troubled assets from the books.