ETF Trends
ETF Trends

The 100th bank failure of 2009 came on Friday, Oct. 23, and more followed suit. This grim milestone underscores that the financial crisis has shifted from the large banks down to the smaller ones. What will it mean for these exchange traded funds (ETFs)?

The troubles facing the largest banks have trickled on down to the smaller banks, and it could get worse. There are an estimated 600 more banks that could fail if conditions don’t change, and some say as many as 1,000 banks could go under. The difference with these banks is that they’re not getting a helping hand from the government.

The Economist points out the host of issues that regional and community banks are facing right now:

  • They are too small to pose a threat to the entire system and thus too small to require saving
  • They are heavily exposed to commercial property, an asset class that continues to struggle
  • The total of failures also disguises the size of individual collapses; banks accounting for more than 3% of the system’s total assets have fallen in the current cycle (compare that with 4.4% of assets in the entire ’80s Savings & Loan crisis)
  • 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 Savings & Loan crisis

There are 416 institutions on the problem list of the Federal Deposit Insurance Corporation (FDIC). (Other reasons regional banks are struggling).

Although the demise of small banks does not threaten the system the same way that the large institutions does, taxpayers bear the brunt of further loose strings. (How financial ETFs are grappling with the aftermath of the initial financial crisis.) This could force the FDIC  to borrow from a $500 billion credit line with the Treasury. It will also affect small business owners who rely on local lenders, with credit becoming harder to come by. (How will this affect related shares and ETFs?)

As Wall Street’s outlook begins to patch it self up, Main Street may see harder times ahead. (Will the latest community banks ETF go down with the news?)

  • SPDR KBW Regional Bank ETF (NYSEArca: KRE): down 25.8% year-to-date

  • First Trust NASDAQ ABA Community Bank Fund (NYSEArca: QABA): up 8.4% since inception on July 1

For more stories about banks, visit our community or regional banks categories.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.