A total of 140 banks have failed year to date and FDIC Chairman Sheila Bair is adding staff, prepared for even more failures next year.

Please consider Seven U.S. Banks Are Seized, Raising Year’s Failure Toll to 140

Seven U.S. banks were seized by regulators today, bringing this year’s total of failed lenders to 140 as financial companies are tested by the recession and the Federal Deposit Insurance Corp. anticipates more shutdowns.

Banks with $14.4 billion in total assets were closed in six U.S. states, the FDIC said in statements on its Web site. The agency is overseeing the dissolution of banks at the fastest pace in 17 years.

Earlier this week, the FDIC boosted its 2010 budget by 56 percent to $4 billion to manage further shutdowns. The total budget will increase from $2.6 billion and the set-aside for bank failures doubles to $2.5 billion over this year, according to a proposal approved by the FDIC board. The agency staff will increase to 8,653 next year from 7,010 this year.

The budget “will ensure that we are prepared to handle an ever-larger number of bank failures next year, if that becomes necessary,” FDIC Chairman Sheila Bair said in a statement. Today’s bank closings will cost the agency about $1.8 billion, according to the FDIC statements.

U.S. lenders are buckling under the weight of loans tied to commercial real estate, which is plummeting in value. Prices have dropped 43 percent from their peak in October 2007, Moody’s Investors Service said last month.

Sheila Bair, tooting Obama’s horn, complains banks aren’t lending enough.

Looking for a reason banks aren’t lending? Here is one reason in pictorial form.

Assets at Banks whose ALLL exceeds their Nonperforming Loans

The above chart courtesy of the St. Louis Fed.

Because allowances for loan losses are a direct hit to earnings, and because allowances are at ridiculously low levels, bank earnings (and capitalization ratios) are wildly over-stated.

Here is an interesting note from the Fed. “For each size category, the sum of all assets held by banks where this ratio is greater than one is divided by the sum all assets held by banks in the class.

In other words, banks whose allowances are negative are excluded from the chart.

There are many more reasons banks are not lending including: rising unemployment, rising taxes, uncertainty over health care costs, proposed cap-and-trade costs, increasing consumer frugality, rampant overcapacity, and boomer demographics.

Correction: Banks whose allowances are negative are included as the divisor in the ratio. The important point still remains. Earnings and capitalization are overstated, and reserves are insufficient.

It is hard to quantify the exact amount because the Fed is purposely making it hard to do so by rule changes that will continue to allow banks to hold assets off the books, as well as rule changes to delay mark to market accounting. Moreover, do not forget the Fed’s various swap-o-rama programs where the Fed swaps treasuries for bank collateral that is more than likely purposely overvalued by the Fed (something an audit might easily disclose). Let’s just say we can easily deduce the problem is huge.

The chart looks ominous and it is.

Mike “Mish” Shedlock
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