Jul 15

Analysts Predict the Downfall of Several American Banks Over the Next Year

downward trend

While real estate prices continue to decline and loan defaults pile up, federal regulators are expecting the downfall of dozens of American banks over the next year. Though it has not expected to be as bad as the savings-and-loan crisis, problems are growing rapidly that small and mid-sized banks are expected go under within the next 18 months. Other lenders are either looking to shut down branches or seek mergers with the bigger fishes.

Though larger institutions such as the Citigroup or Merrill Lynch are in no immediate danger, most are still expected to report billions in write-offs. However, many are still jittery following federal regulators’ seizure of IndyMac Bank, one of the largest savings and loans in the US, with about $32 billion in assets. It was the biggest US lender to fail in more than 2 decades. Moreover, IndyMac was not even in the government’s troubled bank list this spring.

The FDIC has $53 billion reserved to reimburse consumers for deposits lost to failed banks. IndyMac will eat up $4 billion to $8 billion of that fund, the agency estimates, and that could force it to raise more money from the banks that it insures.

At present, the Bush administration is struggling to resolve the crisis on the nation’s two largest mortgage finance companies, Fannie Mae and Freddie Mac. The future of these companies is critical to the financial industry which own $1.3 trillion of securities issued or guaranteed by the two mortgage companies. A default from these mortgage giants would translate to the need to raise billions of dollars in additional capital.

Regulators are currently considering changing the rules that would allow private firms to buy larger shares of banks. In a crisis such as this, the big loss of some could mean bigger opportunities for those who have the excess funds to take advantage of the circumstances.

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