Small Banks are Failing but is a Comeback Imminent?

By Max Resnik

December 23, 2010 Updated Dec 23, 2010 at 7:27 PM EDT

FORT WAYNE, Ind. (Indiana’s NewsCenter) In the past two years nearly 300 small or community banks have failed. It’s a number that is expected to increase dramatically over the next three years.

This year alone 157 small banks have failed. Why they’re failing is in direct correlation to why the economy has done so poorly: Bad real estate loans. The catalyst in the largest economic collapse since the Great Depression is the same catalyst for smaller community banks around the country closing their doors. Another reason they’re closing is the fact that they’re located in collapsing local economies. Poor housing markets and businesses leaving town are causing smaller banks located in smaller municipalities to close their doors or look up for help.

Looking up for help means turning to the so-called Big Banks. Big Banks like Chase and Bank of America, who received billions in bailout money will be needed now more than ever because they have the ability to take care of the assets that the smaller banks cannot.

When a bank fails the FDIC is forced to take these banks over to protect investor assets. Through thousands of bank closures and failures over the last 20 years, the FDIC has insured all deposits.

Regional power Tower Bank could figure to be a player in the next three to five years as it is expected that hundreds of banks will fail. The seven-branch Northeast Indiana financial corporation could take on assets from banks around the state and perhaps the Midwest.

Currently the FDIC has 860 banks on its “troubled” list, the highest number since 1993 when the country was facing the savings-and-loan crisis.

The cost of fixing the failed bank problem could reach more than $50 billion over the next three years.

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