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Bank On More Bank Failures


Trouble ahead for Sterling, Colonial, Popular.

The collapse of Washington Mutual may be the least of our worries.

An analyst at RBC Capital Markets estimates that about 1,000 banks will fail in the next 3 to 5 years.

The good news: Most of the banks will be small, with less than $2 billion in assets, suggesting the banking system can take the multiple hits.

Gerard Cassidy says mortgage delinquencies, home-equity loan defaults, loans on land and non-performing assets are combining to create toxic conditions for banks with extensive exposure in the housing market. In 2008, he expected 200 to 300 banks to fail, but conditions have deteriorated since then.

The mortgage mess has resulted in the collapse of 34 banks since 2007, and Washington Mutual is the largest. JPMorgan (JPM) agreed to purchase WaMu's assets from the FDIC for $1.9 billion in September 2008.

Cassidy and others at RBC Capital Markets have developed the "Texas Ratio" to help spot potentially troubled banks. It's a measure of credit problems as a percentage of the capital a bank has on hand, MarketWatch reports.

The ratio divides the number of a bank's bad loans, including those 90 days late, by its tangible equity capital plus cash on hand to cover future loan losses.

Using the calculation, banks that may be headed for trouble include Sterling Financial (STSA), Colonial BancGroup (CNB), Popular (BPOP), and Huntington Bancshares (HBAN).

Size counts in banking, and Wells Fargo (WFC) and JPMorgan have recently improved their Texas Ratios. But Citigroup (C), US Bancorp (USB) and Bank of America (BAC) slipped, RBC calculated.

"The financial system is working against recovery, and that's the dangerous dynamic we need to change," US Treasury Secretary Timothy Geithner said Tuesday in prepared remarks delivered in Washington. "Without credit, economies cannot grow, and right now, critical parts of our financial system are damaged."

Geithner says President Obama plans a "comprehensive" attack on the banking crisis, but warned that the fix will "cost money, involve risk and take time."

The planned overhaul of the Treasury's $700-billion bailout is intended to redirect the first part of the program, which hasn't yet sparked new lending. Obama's plan is expected to include about $1.5 trillion in new lending and dealing with bad loans.

Consumers concerned about the strength of their bank can check Bauer Financial.

The basics: Keep deposits under the FDIC coverage limit, or open a CDARS account to insure large balances.
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