The banking sector has been largely quiet following the financial crisis easing. But a rumble disturbed the calm last Friday as bank regulators seized troubled Colonial BancGroup Inc. and brokered its sale to another bank, BB&T Corp. The Federal Deposit Insurance Corp. (FDIC) also shut down four other banks Friday, but Colonial's collapse was especially notable—with $25 billion in assets, it's the largest US commercial bank failure this year. Still, this is a pretty small amount in the scheme of things (Lehman Brothers had about $275 billion in assets prior to bankruptcy).
Colonial's failure—underpinned by heavy dabbling in residential construction loans in Florida and Georgia—doesn't mean banks and the economy aren't getting better. BB&T acquiring Colonial simply continues the trend of strong banks absorbing weak ones. Recessions typically have a way of weeding out those who are weakest—this is true across all industries. It's not uncommon for some firms to ail or even die long after the broader economy has turned back up.
Additionally, the orderly nature of Colonial's seizure and sale is encouraging. This is another sign capital markets are stabilizing. Investors shouldn't be spooked by more bank failures—though they're not good things, these failures won't necessarily derail economic recovery. Ultimately, the Colonial event is a small one, and macroeconomic recovery—both US and globally—is not predicated on one bank's survival.
Markets worldwide sold off on Monday, ostensibly because of concerns about the global recovery. Pundits will be quick to claim events like Colonial's failure is a sign the recovery is in a rut, or it's been too far too fast—but Colonial is unlikely to affect markets on a global scale. Monday's broad pullback is an example of the volatility characteristic of early bull markets. Remember, stocks were negative for four consecutive weeks in June and July, before rebounding sharply and powerfully once again. It's never a straight shot up.
We suspect this isn't the last of the casualties from the financial crisis, and that's ok. Capital markets are known for turning the corner well before the causal problems of the bear are totally eradicated.