The First Bank Failure of 2008

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Although its recent losses were tied to bad commercial real estate loans, not residential mortgages, the bank's problems are nonetheless linked to the global mortgage crisis that has ripped through the financial services industry, says William Michael Cunningham of Creative Investment Research. "It's this secondary and tertiary impact of the crisis in the subprime market that's beginning to impact smaller institutions mainly through [the slowdown in] consumer spending," Cunningham says.

Douglass is the first bank to fail in 2008 and the fourth since February of last year. Before that, federal regulators hadn't shuttered a bank since June 2004.

But Cunningham expects other small banks—especially those with weak profits and deteriorating capital bases—to follow suit in the coming months, as the slowing economy limits borrowers' ability to repay loans.

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