Management: seven more US banks fail in one day.

When we wrote about this topic recently ((Don't assume the worse is not to come) we drew attention to the underlying weaknesses in the global economy. And the worrying fact that it is small banks that are failing thick and fast.

Today, the Banking Insurance Securities.com articles list includes :

- Advanta Bank Corp., Draper, Utah. This was, by current failed bank standards, quite large: it had more than around USD1,600 million in deposits and a little less in "assets."

The bank was in such bad shape that "The FDIC was unable to find another financial institution to take over the banking operations of Advanta Bank Corp."

- State Bank of Aurora, Aurora, Minnesota. The bank had just USD27 million in deposits and about the same in "assets." This bank was not in such bad condition: it was taken over by Northern State Bank of Ashland, Wisconsin which, unusually in current conditions, is paying a 0.5% premium to take over the deposits.

In all cases, where the bank is taken over, the acquiring bank enters into what FDIC calls a "loss-sharing agreement" - that means, simply, that the acquiring bank buys the assets at an agreed value (not face value) and if those assets turn out to be unrecoverable, the bank claws back the losses. For State Bank of Aurora, FDIC estimates that there will be claw-backs of around USD4.2 million.

Why is this happening?

Regulators are stepping up their supervision and its easier to start with small banks, make a noise about them and hope that big banks have sorted themselves out by the time the inspectors get around to them. So there is a disproportionate representation of small banks in any sample. All regulators, in all sectors from lawyers to banks, do the same.

The small banks are unable to raise capital and without that they cannot lend more. If they can't lend more, then their bad debt becomes an increasing proportion of their outstanding debts. That means, simply, that the balance sheet becomes steadily weaker and that, in turn, leads to more problems in getting capital.

Small banks have a higher proportion of small, local - and often vulnerable business. Because they are closer to their clients, they tend to afford them accommodations that larger banks would not. It's hard to take a friend's factory or farm off him. So when a debt is declared bad, it's often much worse than a large, impersonal bank would have suffered.

This demonstrates that capital is not reaching "Main Street" despite the substantial amounts thrown into the banking sector to rescue it.

Some large banks have already repaid all or most of the money they were lent as part of the rescue. It never reached small businesses in the countryside.

As a result, there is every expectation that more businesses will fail. The banks that take over failed banks cannot afford sentiment and so credit will tighten, accommodations will be reversed in some cases and not extended in others.

So far this year, 37 US banks have failed. In the whole of last year, there were 140: that was a record. So far this year is shaping up to be worse.

This year the banks are smaller, on average. And that means small businesses are failing, too.

That cuts the legs from under the economy and any recovery that may be touted.

And that leads to just one conclusion: a double-dip recession.

Add that to the factors we discussed in the previous article and the prospect of a serious downturn is already this side of the horizon, and moving fast in our direction.