NEW YORK ( TheStreet) -- There are hundreds of small banks scattered across America that are buckling under the burden of rising loan defaults and investment losses. As a result, bank failures will accelerate into next year.

The number of undercapitalized banks has increased to 126 from 116 in the second quarter, based on preliminary third-quarter financial results for most U.S. banks and thrifts provided by SNL Financial.

At the same time, it's clear that the country's largest banks, including three that haven't begun to repay government money received the Troubled Asset Relief Program, namely Bank of America ( BAC), Citigroup ( C) and Wells Fargo ( WFC), are going to safely navigate the credit crisis.

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The ranks of undercapitalized banks swelled last quarter even though 30 banks and thrifts on the previous list had failed, including five last Friday.

Most banks and savings and loans need to maintain tier 1 leverage, tier 1 risk-based and total risk-based capital ratios of at least 5%, 6% and 10% to be considered well-capitalized under regulatory guidelines, although some trust banks have much lower capital requirements. The ratios need to be at least 4%, 4% and 8% for most to be considered adequately capitalized.

Most undercapitalized banks have taken radical steps to preserve capital, including cutting expenses, laying off workers and suspending dividends. Most are trying to raise capital from outside investors, and many are merging with other institutions. However, with the Federal Deposit Insurance Corp. providing generous loss-sharing guarantees for acquirers of failed institutions, it's hard for smaller banks and thrifts to raise money.

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