Chance of an IndyMac in New England is slim
Those dramatic scenes of IndyMac Bank customers in California lining up by the hundreds to yank out their savings inevitably caused some consumers here to worry about the safety of their own accounts.
The Federal Deposit Insurance Corp.'s takeover a week ago of IndyMac in one of the country's largest bank failures also conjured up memories of the New England landscape in the early 1990s when about 15 percent of the region's banks disappeared.
Fortunately for us, we don't have much to worry about this time.
As the number of bank failures rises nationwide following the collapse of the subprime mortgage market and broader housing and credit market woes, the vast majority of New England's banks are poised to weather the storm.
Gerard Cassidy, a bank analyst with RBC Capital Markets in Portland, Maine, received widespread attention this past week after he predicted that 300 banks would fail within the next three years if the economy doesn't rebound. That's double the 150 failures Cassidy predicted in February.
But you know what? Cassidy says he expects very few, if any, of those failures to occur in New England. Bank managers around here remember the poor lending decisions that got them or their peers into hot water about two decades ago - and they've been in no rush to repeat those mistakes.
“A lot of banks saw Jesus, and they didn't want to go back to him,” Cassidy says.
John Carusone, president of Bank Analysis Center Inc. in Hartford, says the change of habits easily can be tracked by following the amount of bad loans banks carry on their books.
Carusone's number-crunching shows an average of 7 percent of bank loans in Massachusetts and across New England in 1990 were considered nonperforming - loans where borrowers stopped making monthly payments.
By the late 1990s, the percentage of bad loans at banks in the state fell below 1 percent, and reached a low of 0.2 percent in 2005. That average ratio crept up slightly since that time as falling house prices squeezed many borrowers, but was still only at 0.7 percent in March. The entire New England banking industry essentially mirrored this state's trends, while the national average of 1.6 percent was more than twice the state average in March.
The limited problems that local banks are seeing now largely involve individual homeowners who are struggling between deflation in the housing market and inflation everywhere else.
Carusone says banks were certainly hurt during the last residential real estate bust of the late '80s and early '90s, but it was their overextension in commercial mortgages that really caused them to suffer.
Lynn Browne, an executive vice president at the Federal Reserve Bank of Boston, says developers bet on the state's office park boom in the 1980s and built large offices even if they didn't have tenants lined up. However, Massachusetts' miracle fizzled, particularly in the high-tech industries.
The ensuing downturn left plenty of new office buildings empty with no tenants to make lease payments.
The problems with the housing market at the time also stung banks that issued big commercial loans for major condo projects, only to watch demand for those condos disappear.
Local banks have been helped, to some extent, by the region's increasingly tough construction standards as communities tightened their building and zoning codes in the past decade. Rockland Trust executive vice president Gerard Nadeau says that approach indirectly helped ensure that the overbuilding of the 1980s didn't repeat itself during the recent housing market boom.
The IndyMac disaster hasn't gone unnoticed here in Massachusetts, especially since it occurred amid talk of government-sponsored bailouts for mortgage buyers Freddie Mac and Fannie Mae.
Steven Antonakes, the state's banking commissioner, says his office has fielded some questions from consumers about bank confidence in the past week for the first time in about 15 years. The IndyMac failure generated plenty of headlines. But he says it's in no way indicative of the future for locally based banks, especially since they have not dabbled extensively in the high-risk residential loans that got IndyMac into trouble.
The region's economic health has also played a role in protecting the banks. It may not feel that way now, but the Massachusetts job market and, to a lesser extent, the real estate market are considerably outperforming those in most other states. That, you may remember, was definitely not the case in the early 1990s.
That's when we saw 59 New England banks close in just two years. The banks that survived that disastrous time have learned that they need to make smarter preparations for their future if they don't want to repeat the mistakes of their past.
Jon Chesto is the business editor of The Patriot Ledger. He may be reached at firstname.lastname@example.org.