The bail-out of Bear Stearns and a $4bn (£2bn) fundraising by Lehman Brothers appear to have alleviated the immediate threat of a crisis among the big Wall Street banks, but analysts are concerned that an equally dangerous storm is brewing among thousands of the US's regional banks.
Analysts say that the focus will be on these 8,000 small players in the coming weeks, as the biggest, quoted companies among them begin to report results for the first quarter. These figures are expected to show sharply higher default rates on mortgages, credit cards and personal loans, along with a deterioration in the value of commercial real estate the banks hold as collateral and possibly higher arrears on small business loans.
By the final quarter of 2007, the Federal Deposit Insurance Company (FDIC), which regulates and guarantees customers' savings in these small banks, was reporting that the sector's total net income was at a 16-year low and loan payment arrears had crept up to a five-year high. That has led it to demand some banks find more capital, or face being shut down by the regulator. Ben Bernanke, chairman of the Federal Reserve, predicted in February that there will be some bank failures in the current downturn, but he said the fallout would be minimal.
Matt Kelley, analyst at stockbrokers Sterne Agee in Maine, said investors will focus on which banks – and how many – might be at risk. "Investors will immediately go right to the balance sheet, to the capital ratios, to the write-downs. It's about capital and credit this quarter."
He predicted the pain will be worse among banks in areas where house prices have plunged, sales have stagnated and mortgage defaults are rising. "In markets which enjoyed significant growth and are now experiencing contraction, there are going to be institutions that feel the strain of non-performing assets and falling capital levels."
Already the FDIC has given a 60-day ultimatum to Fremont General, in California, to raise new capital or find a rival to take it over. And last week, Cleveland-based National City put itself up for auction after months of speculation over its finances.Reuse content