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Small Banks Bear Brunt of FDIC Crackdown

New York ( TheStreet.com ) -- Regulators have ramped up efforts to seize troubled banks, yet unlike the two large failures recently, most banks that fail in the final months of this year will be small banks, observers say.

"The government's gotten to the point now where they're comfortable with allowing failure to be an option," says Frederick Cannon, Keefe Bruyette & Wood's co-director of research and chief equity strategist.

Regulators are saying, " 'It's time to address this problem and get this behind us,' " according to Cannon, who adds that the Federal Deposit Insurance Corp. has been adding staff to address the surging problem banks.

Of the more than 8,000 banks in the U.S., Cannon estimates that roughly 150 banks will fail this year.

Cannon says that while more bank failures could fall in the $10 billion to $20 billion asset range, "the vast majority of the failures will be small banks."

With record unemployment and more people defaulting on loans, more banks are having problems with capital. Banks also are starting to feel the pinch of small- to mid-size businesses and other commercial customers in crisis.

KBW said in its latest FDIC Bank Failure Update, published on Monday, that the acceleration of bank failures will continue through the end of 2009 and into 2010. Compared to the rest of the industry, the banks that failed last weekend had a significantly higher concentration of construction loans, according to KBW.

The FDIC on Friday seized four banks with $13.9 billion in assets and an estimated cost to the FDIC of $3.2 billion, or 23% of assets, according to KBW.

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