Regulation can't help oil patch banks

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It is the wider impacts that could undo financial firms, whatever the regulators recommend.

If there is one thing the oil industry’s current situation can reveal about banking, it is simply that banks can fail regardless of how much regulatory oversight and involvement they are under.

In March the US Office of the Comptroller of the Currency sent out a revised handbook on lending guidelines for banks to the oil and gas exploration and production industry. Its last update was in 2014. But for many banks in the oil patch, it’s no help at all. Nothing could have prepared them for the impact of a prolonged period of low oil price. In the end, banks only perform as well as their local economies.

So far no US banks have failed, despite the predictions, but analysts are now calling failures inevitable as loan delinquencies in the sector begin. And indeed, non-performing loans are on the rise: Texas-based Green Bank reported $57.2 million in non-performing assets at the end of the fourth quarter last year, up from $12 million in the same period in 2014. That’s only 1.5% of its assets, but smaller banks across Texas, Arkansas and Oklahoma will find it much harder to weather such a prolonged storm. And there are a lot of little banks. According to the FDIC, there are some 1,300 financial institutions in the Dallas region.

Wider economic impacts

The problem is not exposure to energy loans per se. Having been in the region a long time, many experienced banks began building their reserves back in 2014. The challenge comes from the wider economic impacts of the dip in the oil.

Some 100,000 US jobs in oil and gas have been lost since October 2014, and the losses are expected to accelerate. That means delinquencies on mortgages, credit cards and consumer loans would begin to stack up. And, say the ratings agencies, that is what makes it difficult to predict the outcome for local banks.

Texas banks may have survived the 2008 financial crisis better than their US peers because they were cautious and well-capitalized, but the impact of low oil prices could overwhelm even their famous prudence.