Nearly 1,000 small US banks seen closing in 3-5 years

12 February 2009

As many as 1,000 banks with less than $2 billion in assets and holding more bad loans could fold up in the next 3-5 years, an RBC Capital Markets analyst said while urging the US regulators to shut down these troubled banks.

The faster these banks are closed the faster will the banking industry recover, the analyst said even as US President Barack Obama warned that the US economy is entering a negative downward spiral.

The RBC Capital Markets analysts, who had previously forecast 200-300 bank failures, have revised it to as much as 1,000 as the default on loans by commercial borrowers rose due to the current recession and the worsening economic downturn.

They also warned investors from avoiding bank stocks as they feel that the current downward credit cycle has not reached the bottom end and many banks are still loaded with assets whose prices are inflated. Putting any realistic value would only devastate the capital of the US banking system, they added.

According to them, the US banking system is holding billions of dollars of losses and it is time that this is flushed out of the system as taxpayers and bank stockholders will end up with the losses.

The Federal Deposit Insurance Corporation, an independent agency of the federal government that oversees banks, has put 44 banks under the 'failed' after closing nine banks this year and 25 other banks in 2008 and said there are 171 institutions with problems as of the third quarter.