Three banks in America have gone bust within the past month
Failed lenders are small but watch out for more US banks piling up on the scrap heap
Three banks in America have collapsed over the past month, bringing the total number of failures this year to four. In a country with some 4,700 federally insured lenders, that is a small number. But given that the total last year was zero, the trend is worth watching.
The banks — City National Bank of New Jersey, Resolute Bank of Ohio and Louisa Community Bank of Kentucky — hit trouble for different reasons. In the case of City National and Resolute, it was a result of “unsafe and unsound practices”, the Office of the Comptroller of the Currency said. The Kentucky Department of Financial Institutions, meanwhile, said that “operating losses had started to erode capital” at Louisa Community.
That suggests there is no problem with a particular class of assets, as there was in 2007-2008, when the housing market froze. Johannes Palsson of Angel Oak Capital, which invests in the debt of small banks, notes that there have been some “idiosyncratic issues” in energy and agriculture, but “overall credit is great”.
But many banks are struggling anyway, in an era of low interest rates and hot competition. Scott Hildenbrand, analyst at Sandler O’Neill, estimates that new commercial real estate loans, for example, have an average interest rate of 4.2 per cent, down more than a full percentage point from a year before.
The more margins stay low, the more likely banks are to move into unsuitable areas to boost them. Many companies are already carrying more debt than they can handle, while households are showing signs of strain, too. The latest survey carried out by the New York Federal Reserve, released last week, showed record-high consumer loan balances and worsening delinquency trends in car loans, student loans and mortgages.
Granted, the three bust banks are small canaries in the coal mine: between them they had less than $200m in assets and five branches. But the last time there were zero US-bank failures was 2006. In 2007 there were three. The year after that? No one needs reminding.