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Local Banks Bring Crisis to Main Street?


All eyes are on the 19 stress-test banks. That's a mistake.


Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial). It's being shared here for the benefit of the Minyanville community.

To Professor Udall's questions regarding the stress tests:

"Might it actually be much more important how the banks that need capital will be allowed to acquire it, and how much time they're given, as opposed to the actual "no pass" on the stress test?

"For example, what if the banks are given time to "earn out" the capital through profits and thus rebuild capital bases over time?"

I expect that banks will be given approximately 6 months to address their capital needs. The amount of capital that the regulators will be asking the banks to raise is the incremental capital needed to close the gap between run rate revenues and forecast losses. (And in this regard, "earn out" capital is already included.)

I expect that most banks will look to close the gap through Tangible Common Equity generating asset sales, not unlike Citi's (C) sale of Nikko Cordial this morning. And I expect that failing banks will announce their divestiture candidates when the stress-test results are released late next week.

But I would offer 3 thoughts: First, the marketplace for bank assets looks like the world's biggest garage sale, as banks globally are selling whatever capital generating assets they can find left and right. But please, please remember, the businesses that best generate capital are the ones that fuel earnings growth on the other side of this crisis. And I continue to believe that most analysts have woefully underestimated how much of the ship is going to be burned to fill the capital engine between now and then.

Second, and as I offered earlier this week: It's not what happens to the failing banks that matters to me. It's what happens to those that pass. And I, for one, remain doubtful regarding any bank's ability to repay TARP anytime soon.

Finally, while all eyes are on the 19 stress-test banks, I would recommend that Minyans check out what I believe is a much bigger problem, and that's the list of smaller troubled banks who have received Enforcement Actions from the Federal Reserve in 2009.

A new bank is added to the list almost daily. And while, in dollar size, these banks don't add up to much, from a local market standpoint, they're significant. (Please look at XRH and KRE for a sense of how the regional banks are trending).

To me, it will be the failure of hundreds of small banks which brings this crisis onto Main Street for most Americans.
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