Experts: Va. faring well in financial crisis

No one imagined a year ago that Wachovia Corp., one of the largest employers in the Richmond area, or Washington Mutual, a $300 billion thrift, would vanish from the banking scene.

It was inconceivable that lending among banks would halt, freezing credit lines and causing havoc in the global financial markets.

Nor was anyone talking about the federal government providing liquidity to the banking system through multibillion-dollar investments.

TARP -- the Troubled Asset Relief Program, allowing the U.S. government to invest in banks -- was not part of the vocabulary.

In all, 38 state-chartered banks in Virginia have applied for TARP money totaling $713.9 million, according to the State Corporation Commission's Bureau of Financial Institutions. The money is an investment in healthy banks, which will shore up their capital levels so they can make more loans.

Meantime, some healthy banks are expected to buy ailing counterparts stuck with bad real estate loans, ushering in a new era of bank consolidations, banking experts say.

Either way, the banking landscape is changing here and nationwide.

"There's a sense from the Treasury and the Fed that we are still facing some major challenges in the financial markets, but maybe the most critical period is behind us," said Bruce Whitehurst, president and chief executive officer of the Virginia Bankers Association.

In all, 25 banks nationwide went under last year. None was in Virginia.

"Our banks continue to remain well-capitalized and well-managed," said state Banking Commissioner E. Joseph Face Jr.

"I am not expecting any failure of any kind [in Virginia]," he said.

In perspective, nearly 1,500 financial institutions nationwide failed during the savings and loan crisis in the late 1980s and early 1990s.

The most recent bank failures in Virginia were in 1992. Two banks were closed in 1992, one in 1991 and one in 1982, for a total of four since 1982.

"If only 25 banks failed last year, in the most unimaginable economy that we couldn't have dreamed up, that says to me that the FDIC-insured banking industry is effectively regulated and supervised," Whitehurst said.

The Federal Deposit Insurance Corp. was started in 1933 during the Great Depression to restore confidence in the banking system. Last year, the FDIC boosted insurance per deposit account from $100,000 to $250,000.

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Financial turmoil, once thought to be a big-bank problem, spilled over last year into community banks, many of which were caught off-guard by investment losses in Fannie Mae and Freddie Mac.

The two mortgage giants, after suffering from bad mortgage loans, were taken over by the government in September.

About 25 financial institutions in Virginia, including Richmond-based First Market Bank, Central Virginia Bankshares Inc. in Powhatan County and Eastern Virginia Bankshares in Tappahannock, took financial hits from their investments in the mortgage companies.

Despite the blows, all are expected to survive, banking experts say. "Our banks are in a good position to continue to weather the impending storms," Face said.

How well they fare in the coming months will depend on the economy.

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"It appears we will have another year of a lot of challenges, although hopefully not as many as the big, unexpected surprises we had last year," Whitehurst said.

Bank stocks continue to be out of favor with investors, so they have had trouble raising capital.

The infusion of cash from TARP is expected to ease the problem. The question is how fast the liquidity will spread through the financial system.

"In order to have a healthy economy, you need a healthy banking community, and I think we are beginning to heal," said Kent Engelke, chief economic strategist with Capitol Securities Management.

This year could bring a new wave of consolidations, especially because bank stocks are trading at steep discounts to their underlying value.

Well-capitalized banks could offer to buy other banks at twice their prevailing stock price, which would appeal to shareholders, Engelke said.

Mergers are likely to occur among small to mid-size banks.

Bank of Essex, for example, bought four branches of a failed bank in suburban Atlanta last November. The Henrico County-based bank assumed deposits of $600 million and none of the bad debt. It paid 1.36 percent on those deposits or about $3.2 million.

Meantime, large banks could be required to divest of some assets, once the financial system stabilizes. The U.S. has learned the painful lesson of institutions considered too big to fail, Engelke said.

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Expect more regulation, which will stifle creativity and economic growth, he said. "It will be a knee-jerk reaction to having the whole financial market on the verge of exploding," Engelke said.

For consumers, more regulation will mean higher fees, he said.

"What I am envisioning is a period of time where ingenuity and creativity will be stifled by massive regulation, regulation that should be expected given the utter chaos and calamity of today's environment. No one has a clue of the unintended consequences of Wall Street being moved to Constitution Avenue."

Despite industrywide uncertainty, banks stand to make a lot of money, especially with corporate loans, Engelke said. The opportunity for huge gains with nominal risk is too enticing to pass up, he said.

Engelke said he is not suggesting that the banking environment will revert to how it was two years ago, when money was free and easy.

"But Armageddon will not occur as we muddle through an environment where growth is between negative 1 percent and positive 1 percent for a prolonged period of time."

Contact Carol Hazard at (804) 775-8023 or .