In 2008, RBC Capital Markets’ analyst Gerard Cassidy forecast 200 to 300 bank failures, and we thought that was devastating — until now. Cassidy said Monday the economic environment has further deteriorated and more than 1,000 banks may go under during the next three to five years, as loan losses rise. “There are billions of dollars of losses embedded in the system, and the system has to flush them out,” Cassidy said, according to Bloomberg. Friday, regulators shut down three banks which marked the seventh, eighth and ninth bank failures of the new year. The week prior, another three banks closed in quick succession — signs off an all-too weak economy. Cassidy predicted most of the forthcoming failures will probably occur at banks with less than $2 billion in assets as their commercial customers default. “The people that are going to take the losses are the taxpayers and bank stockholders…” Cassidy said. Regulators are taking steps to help lenders avoid losses as President Barack Obama’s administration works with Congress to hash out the details of a new rescue package, which is likely to include guarantees for toxic assets. The Federal Deposit Insurance Corporation has already boosted the estimated cost of bank failures through 2013, following banks’ dismal fourth-quarter reports. The agency said failures through 2013 may cost upwards of the $40 billion estimated in October. “We are nowhere near the end of this down leg in the current credit cycle,” Cassidy said. “Bank stocks will likely remain under pressure as the industry confronts its credit problems, de-leverages and raises common equity over the next 12 months.” He also cautioned investors against bank stocks in such an unstable environment. Interestingly, Cassidy and his colleagues developed an early-warning system for identifying future trouble at banks using a calculation referred to as the Texas Ratio. It measures credit problems as a percentage of the capital a lender has available to deal with those problems. Cassidy formulated the ratio after covering Texas banks in the 1980s, according to a Market Watch report. He noticed that when problem assets grew to more than 100 percent of capital, most of the Texas banks in that position ended up failing. Write to Kelly Curran at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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