Corporate Bankruptcies: The Next Hurdle For Banks

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The list of problems that could hurt bank earnings is already pretty long. The first big problem was mortgage-backed securities. That was followed by consumer credit write-offs. Then came loans for commercial real estate. That gets added to LBO lending defaults.

Over the last week or so another, a very large problem for banks has begun to become more prominent–the bankruptcies of big companies. Citigroup (C) has said it will take a write-off of more than a billion dollars on the Chapter 11 filing from Lyondell. Chemical company Tronox filed for bankruptcy today.

Industry analysts expect about 25% of retail chains to go bankrupt in the next two years. GM (GM) and Chrysler creditors are going to get bloodied.

As the economy gets worse, so will bank write-offs driven my bankruptcies of firms they loaned money. There is nothing the financial firms can do about it other than to hope it does not snowball into a problem as big as derivatives or consumer credit.

The period when Chapter 11 and Chapter 7 filings will keep rising could go on all year. That means banks have four more quarters of with a threat to their numbers.

Douglas A. McIntyre