While the economy seems to show signs of improvement, perils continue to lurk around every corner for banks, hit hard by a storm in part of their own making.
The latest threat to banks: the rising tide of bankruptcies that is not expected to crest until the middle of 2010.
So far, banks have been hurt the most by the historically weak real-estate values, which have in turn left people unable to pay back their loans.
Many economists, including Dan North of Euler Hermes ACI, expect Chapter 7 bankruptcy filings to ramp up, which will drive up banks’ loan losses.
In an article written by Matthias Rieker for CNNMoney.com, North reports that his company anticipates a 45% increase in bankruptcies this year, in an economy that is still expected to contract by another 3%.
The rise is due in part to banks tightening their underwriting standards.
Bankruptcies are also expected to continue to rise even when the recession has passed, says North. Next year will see the trend begin to slow, but bankruptcy levels still could be 40% above their current levels.
All this means that the banks will face significant political pressure to lend more, as well as pressure from investors looking to take advantage of the recovering economy.
North says that those pressures won’t be enough to take the sting out of the overall bankruptcy trends.
Bankers want to get back to business, but only at a safe level of risk, and next year will be a cautious one for many banks, still recovering from the crisis.
The vast majority of bankruptcies are individual ones, and most of the business bankruptcies last year came out of the banking sector, but more large businesses may be running out of steam before the economy recovers, including large industrial groups such as paper, metal and chemical companies.
That will take a toll on the banks, though just what sort of toll is unclear, even to industry experts. The reason for the uncertainty is that unlike individuals, who largely finance through banks, big businesses also do so through bonds and equity.
According to the Federal Deposit Insurance Corporation, commercial and industrial loan losses have increased, slowly last year but picking up speed through the first quarter of this one. Currently, business losses make up 1.8% of the total.
As large companies come to grips with their losses, and whether or not they are able to withstand them, banks are hoping to withstand the chain reaction to follow.
But, some industry analysts are worried that if the losses mount up too high, commercial loan defaults may become the “next subprime,” or the next catalyst for widespread and devastating economic recession.
Throughout the economic food chain, individuals, businesses, banks and investors, are all hoping for the best. One subprime was enough for any century, let alone decade.