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In September 2008, two weeks prior to the failure of Washington Mutual (now part of JPMorgan Chase (NYSE: JPM ) ), I wrote: "I think we could see a large wave of bank failures, possibly numbering in the hundreds." With 140 bank failures in 2009, and 20 so far this year, we are well on pace to achieving that. While most of the names on the tombstones in the banking graveyard are obscure, an acceleration in small bank failures is an ominous sign for even the largest banks, including Bank of America (NYSE: BAC ) , Citigroup, and Wells Fargo (NYSE: WFC ) .
One of the major contributors to small bank failures is losses on commercial real estate loans. Smaller banks can't tap the capital markets to bolster their balance sheets as easily as a Wells Fargo or a Citi can.. That loss cycle hasn't peaked yet; in fact, according to a Congressional Oversight Panel report on commercial real estate losses published this month, "the most serious wave of commercial real estate difficulties is just now beginning." The data suggests that's no exaggeration.
Delinquencies have yet to peak
Credit rating agency Moody's (NYSE: MCO ) reported that the loan delinquency rate on commercial mortgage-backed securities (CMBS) rose to 5.42% in January, exhibiting the largest increase since the crisis began.
Another rating agency, Standard & Poor's, found that during the prior two recessions delinquencies on CMBS peaked 25 months and 15 months after the recession ended. Even using the lower of these figures and assuming this recession ended in June 2009, we'd then expect delinquencies to peak no earlier than the fourth quarter of this year.
Losses are yet to come -- at small and large banks
While smaller banks carry a proportionally higher exposure to commercial real estate loans; national and large regional banks (such as Zions Bancorp (NYSE: ZION ) or M&T Bank (NYSE: MTB ) ) still have substantial exposure. If you own shares in these institutions, don't be lulled into thinking that all losses tied the credit bubble are behind us -- that would leave you open to some nasty surprises this year and in 2011.
The Fed is creating a new set of risks for investors -- Tim Hanson explains why it's time to get out now!