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By Jason Simpkins
More than 900 small and mid-sized banks could face an aggregate $200 billion in losses by the end of next year if economic conditions worsen, according a study conducted by The Wall Street Journal.
Using the same worst-case scenario the U.S. Federal Reserve employed in its recent stress test of the 19 largest U.S. banks, the Journal examined the health of 940 small and midsized banks that had total assets of $2.8 trillion as of Dec. 31, 2008. Because the study was based on data from 2008 filings with the Federal Reserve, it did not take into account any capital raised by the banks this year. Banks analyzed included large regional banks, as well as small town rural banks and U.S.-based subsidiaries of foreign banks.
Under the Fed's baseline scenario, which is predicated on an 8.8% unemployment rate for 2010, total losses at the 940 banks surveyed could reach $92 billion, with 185 of those banks facing significant capital shortfalls, the Journal found.
However, many analysts criticized that scenario as too generous, considering the unemployment rate hit 8.9% in April, and is showing no signs of abating. The "more adverse" scenario includes a 2010 unemployment rate of 10.3%.
Under that scenario, the amount of losses incurred by the banks would exceed $200 billion and leave 923 banks with more losses than revenue. At 634 of those banks, the gap would be large enough to reduce capital below the level considered to be sufficient by federal standards.
The $2.8 trillion in assets held by the banks studied by the Journal is less than the combined worth of Bank of America Corp. (NYSE: BAC) and Wells Fargo & Co. (NYSE: WFC) – two of the 19 banks probed by the Fed. But with less earning power and fewer assets, those that survived another downturn would have to dramatically reduce lending, further exacerbating the current recession.
Regulators have already seized 33 banks this year, and 58 since the start of 2008.
News and Related Story Links:
- Wall Street Journal:
Local Banks Face Big Losses
- Money Morning:
Bank Stress Tests: The Results Are in; Now What?