Lenders Who Financed Oil Companies Share the Pain

Big energy companies aren’t the only ones losing out on the dramatic fall in oil prices. Banks are in the hot seat, too.

Hundreds of banks were forced to shut down in Texas when the state fell into a recession in 1986 during a steep decline in oil prices. That 1980s meltdown mirrors the current drop in prices that carried oil below $45 a barrel this week.

Cheap credit helped fuel the U.S. shale boom, allowing countless energy companies to find oil in new places. Banks also capitalized on economic booms in oil-rich regions like Texas and North Dakota. It would only make sense for these same banks to feel some pain from oil’s downward spiral.

Drilling projects that made sense at $100 may now be losing money, creating headaches for the lenders that financed the expansions. Some highly-leveraged shale companies may even go belly up due to the plunge in oil prices.

But there’s also the economic fallout of the energy meltdown. It’s great for consumers saving money on gas, but Texas is bracing for a wave of layoffs and a possible oil-fueled recession. Other big energy regions like North Dakota, Oklahoma and Alaska are also facing economic headwinds.

Bank losses likely to grow: If the oil plunge causes certain economies to stumble, banks are likely to be hit by higher credit losses and a slowdown or even decline in loan growth. Likewise, fees for wealth management and customer activity could be dented.

“If you’re a small bank in Texas or North Dakota, the risk goes well beyond drilling for oil or gas. You funded the mobile homes that workers live in, the doctor’s office and other facilities that live off the energy industry,” said Dick Bove, a banking analyst at Rafferty Capital Markets.

via CNN

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza