Stress in the oil industry is starting to contaminate other parts of the American economy.
For the first time since oil prices began crashing in mid-2014, banks polled by the Federal Reserve are warning of a "spillover" effect onto loans made to businesses and households in energy-dependent regions of the country.
Senior loan officers of nearly 100 banks acknowledged that credit quality has "deteriorated" on everything from auto loans and credit cards to commercial real estate mortgages. Translation: More people aren't paying and delinquencies are rising.
It's a sign of how the deep spending cuts, mass layoffs and even bankruptcy filings in the oil patch are inflicting real pain in certain energy-focused states like Texas and North Dakota.
Some large U.S. banks have individually warned of early signs of so-called contagion.
For instance, last month Wells Fargo (WFC) said office vacancies in the Houston area have risen and multifamily housing activity is looking "a little bit weaker." That makes sense given the rise in bankruptcies and the mass layoffs announced by Houston-based energy companies like Halliburton (HAL), Baker Hughes (BHI) and ConocoPhillips (COP).
"Those are things that those regions are going to have to grapple with," John Shrewsberry, Wells Fargo's chief financial officer, said during a conference call with analysts.
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Unlike in previous surveys, the Fed asked senior loan officers special questions tied to the downturn in the oil and natural gas businesses.
Not surprisingly, most banks said they expect more deterioration in loans made to oil and natural gas drilling companies this year.
These energy troubles are already creating headaches for bank stocks, which have fared far worse than the broader market this year. In recent weeks big banks have announced major losses linked to loans in the oil and gas sector. For example, Bank of America (BAC) set aside nearly $1 billion to protect from loan losses, mostly by energy customers.
JPMorgan Chase (JPM) boosted its provisions for credit losses by 88%, mostly due to its oil, natural gas and pipeline business.
But the trouble had spread to related businesses. At least 25% of banks surveyed by the Fed said it had affected auto loan in energy-dependent regions.
That mirrors findings elsewhere. Credit score tracker TransUnion reported oil-focused states like North Dakota, Texas and Oklahoma experienced a spike in seriously delinquent (60 days or more) auto loans during the fourth quarter of 2015.
At least 15% of banks in the Fed survey reported deterioration for commercial real estate loans, consumer credit card loans and general consumer loans in those oil-centric regions as well.
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Despite all these worries, banks have indicated that the majority of their overall loans and even ones in energy-dependent regions are healthy. Bankers also say that Texas has withstood the oil downturn pretty well, thanks largely to its diversification into education, finance and healthcare.
"Things (in Texas) aren't as robust as they were, but they're not doing badly," Barbara Godin, chief credit officer at Regions Financial (RF), said during a recent conference call.
So far, the effects of the oil crash don't look as widespread, or a repeat of the pre-2008 mortgage meltdown. The majority of U.S. banks in the Fed survey said loans to the oil and gas drilling industry represent less than 5% of their outstanding commercial loans. By comparison, Goldman Sachs estimates 2007 mortgage exposure represented 33% of bank assets.
Still, the oil trouble is forcing banks to take action to limit their exposure.
Over 80% of banks surveyed by the Fed said tightening lending policies on new loans or lines of credit to firms in the energy sector has been important to mitigate their risk of loan losses. Other strategies include limiting oil companies' ability to draw down credit lines, restructuring loans, requiring additional collateral and setting aside additional reserves.
