Magazine article American Banker

FDIC Sees More Energy-Related Bank Failures Even If Price of Oil Rebounds to $18 a Barrel

Magazine article American Banker

FDIC Sees More Energy-Related Bank Failures Even If Price of Oil Rebounds to $18 a Barrel

Article excerpt

FDIC Sees More Energy-Related Bank Failures Even if Price of Oil Rebounds to $18 a Barrel

CHICAGO -- A "sizable increase" in the number of energy-related bank failures is likely even if crude oil prices rebound and settle near $18 a barrel, according to a report by the Federal Deposit Insurance Corp.

Crude prices have fallen precipitously since December, when the report was written, and if prices settle below $18 a barrel, there will be a "bigger increase" in the number of energy-related bank failures, said Frederick S. Carns, who wrote the report. Mr. Carns, a financial economist in the economic conditions section of the FDIC's division of research and strategic planning, declined to say just how many banks could fail. But at $18 a barrel for crude, serious industrywide problems probably could be avoided.

"We know that some large banks have a significant exposure to energy-related loans," said Mr. Carns. What the FDIC is attempting, he said, is to determine at what price per barrel the problem becomes significant for the banks.

Some energy lending banks have restructured their energy portfolio and the debts of energy firms in order to reflect crude prices of $25 a barrel, Mr. Carns said in his report, but these actions may not be sufficient. "There is some question whether restructuring and new lending strategies have proceeded far enough to cope with the current $18 level of oil prices. For some commercial banks, the new-found conservatism may have been too little and too late for correction of past mistakes, even if oil remained above $25."

Some insights into just how serious the problem is may come next Tuesday when L. William Seidman, chairman of the FDIC, testifies before a House committee.

In December, when Mr. Carns wrote the report, crude oil prices had begun their free-fall and were in the $26-a-barrel range. …

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