Smaller American banks are now at the centre of the credit storm

PARTNERS BANK of Naples, Florida, earned a dubious distinction on Friday October 23rd. It became the 100th American bank failure of the year. On the same day six other lenders—two more in Florida and banks in Minnesota, Wisconsin, Illinois and Georgia—joined the rollcall of failure in the aftermath of the credit crisis.

More banks have failed in other years. The post-war record was set in 1989 when 534 banks went under. That was at the peak of the savings-and-loan (S&L) crisis, which erupted in the late 1980s and continued in the early 1990s. This year has seen more failures than any since 1992, but another 75 banks must go under to overhaul that year’s total.

Counting absolute numbers of failures, however, is not the best way to assess the extent of a financial crisis. The number of banks and thrifts has fallen dramatically since the S&L era, from some 16,000 lenders then to around 8,000 now. According to CreditSights, a research firm, when the current cycle is over, the rate of bank failures may be double what it was during the S&L crisis.

The total of failures also disguises the size of individual collapses. The demise of Washington Mutual, the biggest bank to fail in America so far in this crisis, means that banks accounting for more than 3% of the system’s total assets have fallen during the current cycle already, compared with 4.4% of assets over the entire S&L episode.

Yet passing the hundred mark symbolises how the financial crisis has shifted its focus from large banks to small ones. America’s big banks may face regulatory uncertainty but they take the shelter of government support. Most have diversified businesses so they can offset credit losses with buoyant earnings from investment banking. The recent slew of third-quarter results suggests that the number of non-performing loans is approaching a peak.

Small banks have no such comfort. They are too small to pose a threat to the entire system and thus too small to require saving. And they are heavily exposed to commercial property, an asset class that continues to go downhill fast. In the latest sign of distress, Capmark, one of America’s largest commercial-property lenders, filed for bankruptcy on Sunday.

These factors point to a sharp rise in bank failures. There are 416 institutions on the problem list of the Federal Deposit Insurance Corporation (FDIC). CreditSights estimates that more than 600 banks will fail if conditions stay as they are. If things get really sticky, more than 1,000 could go under (compared with over 1,800 in the S&L crisis).