HomeInternational Banking News

Two small banks failed in October. They won’t be the last if COVID leaves some businesses struggling to pay loans.

Two banks failed in October, the first to collapse since the start of the coronavirus pandemic.

Two small banks failed in October. They won’t be the last if COVID leaves some businesses struggling to pay loans.

Affonda l’economia Usa, pil secondo trimestre -31,7%
Goldman Sachs profit misses estimates on trading weakness
Cina, banca centrale interviene per frenare corsa Yuan

Banking experts say they won’t be the last.

At least 50 of the country’s more than 5,000 banks are considered troubled, according to Bauer Financial, a company in Coral Gables, Florida, that tracks the health of financial institutions.

That means they have high levels of nonperforming loans and not enough capital set aside to protect them if more of their loans go bad or if the economy gets any worse.

The most troubled banks have high levels of bad loans and other assets compared with their total capital on hand, a measure known as a “Texas Ratio” and one of the most important indicators used by analysts to determine a bank’s long-term viability.

Not all of these banks will fail, experts say, and there’s plenty of disagreement as to how many will go under before the Covid-19-related crisis comes to an end.

“I’d say 10 or less,” says Christopher Marinac, banking analyst and director of research with Janney Montgomery Scott LLC, a financial advisory firm in Atlanta. “And a lot of these banks will be small.” So it will be a lot different from 2008 though 2012 when nearly 500 banks failed.

But Jason Vanslette, a mortgage foreclosure specialist and partner at Kelley Kronenberg law firm, is more pessimistic.

From vacant storefronts and office buildings to renters’ inability to pay rent due to financial hardship, he sees the pandemic taking a much greater toll on the economy – one that will result in far more foreclosures, bankruptcies and bank failures than many think.

“We’re gearing up for what could be close to a 2008 housing crisis,” Vanslette said. “And commercial loans, my God. There’s going to be a massive amount of defaults on commercial properties.”

Hotel and retail loans are already going bad in record numbers, and office loans could be the next shoe to drop, Vanslette said. A lot of small businesses are still struggling, especially in areas of the country that depend on tourism or the oil and gas industry.

“It could take 12 to 18 months before we get a real idea of the damage,” Vanslette said.

Two struggling banks

Besides being tiny, the two banks that failed in October have little in common.

First City Bank of Florida in Fort Walton Beach, with its $135 million in assets, had been struggling with problem loans since the last recession. Having to set aside additional capital for loan loss provisions to deal with Covid related problems simply pushed it over the edge.

Almena State Bank, with $70 million in assets, was different. The Kansas bank got hit hard by bad agricultural loans made during the past few years of falling commodity prices brought on by robust harvests and the US-China trade war.

Of the 10 banks considered most troubled by Bauer Financial, six have similar stories to that of First City. They have been weighted down by loan problems for more than 10 years.

The other four are more like Almena – impacted by the flagging economy in farm states, where agricultural loan delinquencies hit an eight-year high in March and repayment rates have continued declining until this summer, according the Federal Reserve of Kansas City.

Commenti