Are Regional Banks Endangered?

So far this year, 64 regional banks have failed, including the seven that state regulators shut down last week. It raises the question whether regional banks and the exchange traded funds (ETFs) that hold them are in for more trouble.

Six of the banks that closed were subsidiaries of one larger bank, the Security Bank Corporation, based out of Macon, GA. Over the past year, Georgia has seen 16 banks go down, the most of any single state, according to Catherine Clifford for CNN Money.

Earlier in the evening, Waterford Village Bank, of Clarence, NY, was shut down, and the FDIC was named the receiver. More than five years have passed in New York since a bank was taken over by FDIC. Friday’s seven closures will cost the FDIC fund $812.6 million, bringing the total cost for failed banks to $14.21 billion this year.

Smaller regional banks have had a challenging time of late. As the U.S. commercial real estate market continues to to deteriorate, regional banks may take the biggest hit.

Recovery within the commercial real estate market seems far off - offices are vacant, apartment rentals and hotel rates remain sluggish. Many regional banks reported losses in the second quarter from weakness in residential and commercial real-estate and construction loans, reports Barron’s.

REIT indexes are 60% below their 2007 highs, but many investors remain wary of the group because of worsening fundamentals. Private-equity firms are in the worst position, and real estate owners with a lot of debt are in the most trouble.

Is this a sign of more to come?

SPDR KBW Regional Banking (KRE): down 24.7% year-to-date

Regional Bank HOLDRs (RKH): down 3.3% year-to-date

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