Sense on Cents

High five to Always Learning for pointing out that not unlike the disparity in the housing and mortgage markets, the banking industry is truly a tale of two systems. Those systems being institutions deemed ‘too big to fail’ and everybody else. I am increasingly concerned about this very prospect. Why?

The largest institutions are now married to Uncle Sam, whether either partner likes it or not. Certain of these marriages (Citi and BofA) are more formal while the balance are more ‘friends with benefits.’

What about the small fry banks struggling with loan books that continue to bleed money but without the capital market activities to generate the gift-like earnings supported by the totally accomodative Federal Reserve? What does the future hold for these institutions?

First and foremost, a significant number of these banks are burdened by rising delinquencies and defaults in their commercial, construction, corporate, and residential loan books. As Bloomberg highlights in writing, TARP Panel Says Smaller Banks May Need Fresh Capital:

Regional and some smaller U.S. banks may need $12 billion to $14 billion in additional capital to cope with troubled loans still on their books, the Congressional Oversight Panel said today in a monthly report.

The panel, which reports to lawmakers and was created to monitor the $700 billion Troubled Asset Relief Program, said the biggest U.S. banks appear prepared to handle more loan losses, particularly the 19 banks that regulators put through stress tests earlier this year. Banks with assets of $600 million to $100 billion may face bigger challenges, the panel said.

My gut instinct tells me that the $12-14 billion figure for banks beyond the top 19 is likely low. That said, where may these institutions raise this capital? One of three places: (more…)