Could Banks Have To Close To Solve Severe Problems?

One of the most respected financial newsletters in the country is predicting that the federal government may have to call a “bank holiday” like the one that FDR mandated during the Depression.

According to MarketWatch, The Harry Schultz Letter is saying that balance sheet problems at banks are getting worse and not better  and “widespread nationalization could result.”

Most analysts think that the threat of the failure of large banks is over, especially due to government funds being pumped into financial firms. But, there are several reasons that conventional wisdom could be wrong.

Banks still hold huge amounts of real estate debt, both mortgages and commercial real estate. Housing prices could correct another 10% to 15% leaving more and more home loans underwater which will almost certainly cause rising default rates. Large commercial office building and malls are losing tenants pushing the ability to pay bank real estate loans down. Banks may end up owning large amounts of commercial property that cannot be sold.

Banks also hold almost $1 trillion in credit card debt. The rule of thumb is that credit card defaults track unemployment, which means banks could face 11% or 12% write-offs on credit card portfolios. That could drive tens of billions of dollars in unanticipated losses.

What would the government do it the financial catastrophe got worse again? Maybe close banks to hold off a panic.