Bank ETF Investors: Regionals Are Not too Big to Fail

The 19 largest U.S. banks may now be off the critical list thanks to billions of dollars in government support, stage-managed “stress tests,” and a raft of equity issues floated into the rather suspicious-looking doubling in financial stocks over the past two months. But what about the 8,000 or so smaller banks in the United States?

When you are not too big to fail, you are … well, allowed to fail. The Federal Deposit Insurance Corp. closes your doors. So the list of failed regional banks keeps growing. According to the FDIC, there were three banks shuttered in 2007, another 25 in 2008, and 32 more in just the first 18 weeks of 2009.

As the list gets longer, warns the May 20 issue of Standard and Poor’s The Outlook, it could have negative consequences for investors in smaller banks — specifically, holders of exchange-traded funds such as the iShares Dow Jones US Regional Banks (IAT) and SPDR KBW Regional Banking (KRE).

Comments

[TraderRob:]

As the foreclosure moratorium ended in March the number of defaults and thus foreclosures will undoubtedly rise. This will be a drain on consumers' balance sheets, yet the real issue is the jump in REO (real estate owned) properties seen in April that will continue to parallel increased foreclosures into the future. REO's aren't often discussed by mainstream media, but they are extremely important given the current recession. REO's are the properties which have gone into foreclosure where no reasonable bids were made at auction and banks were forced to buy back and hold the properties on their balance sheets. These are the properties responsible for the "write downs" that banks have endured to date and an increase in REO's will be solely responsible for the bankruptcies of hundreds of regional banks moving forward.

May 22 01:46 AM