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US banking sector faces a miserable 2016

Following the worst first quarter since 2007, Olivia Oran at Reuters reports an anticipated slump in US banking in 2016:

“Concerns about economic growth in China, the impact of persistently low oil prices on the energy sector, and near-zero interest rates are weighing on capital markets activity as well as loan growth.”

Nor is Oran alone in in her pessimism.  Ben McLannahan at the Financial Times raises particular concern about the impact low energy prices have had on the ability of energy companies to service their debts:

“As borrowers stop spending on exploration to conserve cash to service debts, the value of their oil reserves falls too — and hence the size of their credit lines from the banks, which are usually reassessed every six months.

“One senior executive at a big Wall Street bank, speaking on condition of anonymity, said that he expected cuts to reserve-based loans of about 15 to 20 per cent during the current redetermination season.

“[This] trouble in the oil patch has already inflicted particular damage on banks exposed to energy with lenders including JPMorgan, Comerica and BB&T pre-announcing hits to earnings in recent months.”

No doubt the Federal Reserve will do whatever it takes to prop up the US banks at least until another Washington insider has been installed in the White House in November.  But the combination of debt defaults, investor flight and a collapse in the BRIC economies could still test the extent to which the Banks are still too big to fail before 2016 is out.

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