A half dozen smaller banks will fail in the next three weeks, predicted Don Musso, president of management consulting firm FinPro, earlier this week during a banking conference in Edina, Minn.
“This is the world the regulators live in,” Musso said April 30 during the Bank Holding Company Association spring seminar. “Understand the brain drain that happened in D.C. Everybody who looked like us, a little bit older, a little bit grayer, they’re gone. It’s a bunch of young, 30, 40 year olds who have never lived through a downturn before. They’re going to go through this for the first time and they are not going to know how to handle it. They don’t have the seasoning that some of those old, seasoned examiners have.”
Musso’s presentation came only four days after Philadelphia-based Republic First Bank became the first bank to fail in 2024. The bank was shut down by Pennsylvania’s bank regulator, with the FDIC seizing control of the institution. An analysis of 4,000 U.S. banks by consulting firm Klaros Group found 282 face the combined threat of CRE loans and potential losses from higher interest rates.
Musso said there are 52 troubled banks in the United States and $66 billion in troubled bank assets. Of those, up to eight are being resolved. Musso said the troubled banks were identified by an internal FinPro platform relying on public data to run reports on any bank in the United States. He claimed the platform identifies problems faced by a bank along with how regulators will respond to the issue. Using artificial intelligence, FinPro then weighs each problem on a 0-100 scale, with 100 signifying a “death knell,” Musso said. He expects to introduce a community bank shared risk pool in the next two months allowing banks to pool their money to buy the uninsured deposits of any failed bank.
Mixing humor with his serious broader message during the hourlong address, Musso said banks are well-positioned for an economic downturn and will have a strong second half of the year. Banks have record levels of capital, with Tier 1 ratios averaging more than 10 percent and risk-based capital ratio more than 14 percent. “We can manage that,” he said of the potential downturn. “We have more capital than God. Even if there is an economic disturbance, we can withstand that.”
Musso said regulators should account for the need of banks to instantly access funding sources to account for last spring’s failures of Silicon Valley Bank, Signature Bank and First Republic Bank, all of which were attributed to rapid deposit runs. Musso said on-balance sheet liquidity is no longer a significant consideration as banks instead prioritize where they can borrow, whether through the Federal Home Loan Bank system or Federal Reserve.
“What matters is, what you have in your Fed master account and whether you can get into that Fed master account quickly,” he added.