Most investors think it’s just the oil industry that suffers from bottom-of-the-barrel prices, but that’s not true. Consider this: Major integrated Oil & Gas companies have a debt-to-equity of 41.4. Chevron (NYSE: CVX) alone has $35.88 billion in debt.

And that debt touches other industries and sectors, like banks. And just how much of U.S. bank assets do these energy loans make up? The answer might surprise you.

#-ad_banner-#U.S. banks have thrown down enough money on energy to fund a small country: A whopping $123 billion-worth of outstanding loans and lending commitments.

To put that in perspective, that $123 billion is greater than the annual GDP of Ghana, and twice the size of the GDP of Puerto Rico.

These loans and lending commitments account only for U.S. banks’ stakes. The global implications of oil debt could forecast a far scarier scenario for the global economy.

What happens when these banks’ bets on energy is wrong? What happens if energy companies default on their loans, a la the housing crisis?

According to the report, these assets wouldn’t trigger a financial crisis like the mortgage scandal back in 2008. But that doesn’t mean that these banks are going to weather an energy default cliff well… And some will do worse than others. Consider Capital One (NYSE: COF) and JPMorgan Chase (NYSE: JPM). 

If oil prices stay low, JPMorgan says it’ll have to increase its reserves by as much as $1.5 billion.

In January, the company’s Chief Financial Officer Marianne Lake said, “As the outlook for oil has weakened, we would expect to see some additional reserve build in 2016, but prices would need to remain at this level for an extended period for them to be significant.”

I don’t know about you, but I’m not going to put a lot of faith in oil prices making a big move higher any time soon.

But the bigger issue in this mess is the quality of loans and lending commitments.
JPMorgan said in a presentation at the end of February that 61% of its oilfield-services credit exposure is junk. A full 40% of energy-related loans are unrated or below investment grade!

And this holds true for a number of banks making energy loans.

Goldman Sachs (NYSE: GS) also told investors that 40% of its $10.6 billion in loans and commitments to the energy sector are to junk-rated firms.

Source: BloombergGadfly, Janney Montgomery Scott, Wells Fargo presentation at Credit Suisse Financial Services Forum, Goldman Sachs

It’s almost as though these big banks are acting like ill-prepared hedge funds. We know these loans will probably be written down, swept off the balance sheets, and investors could take a bit of a hit because of it.

Now, of course Goldman Sachs and JPMorgan aren’t like Golub Capital, the $150 million hedge fund focused on energy-related debt.

Well, not exactly like Golub, anyway… The hedge fund was forced to close after severe losses. GS and JPM are still around, and still funneling money into energy.

And here’s the thing. Investors are starting to hold banks accountable.

For the past year, oil prices have fallen 43.8% while the S&P 500 Financials index has fallen 10.8%.

That means that even if an energy credit crisis doesn’t impact banks to the same degree as the mortgage crisis, there’s still going to be a lot of pain, and banks won’t be able to hide that pain from investors.

Risks to Consider: This crisis is just heating up… Many banks still have billions in lending commitments to fulfill. That means energy companies can still draw on credit, and banks are obligated to lend. That could make preparing for any loan defaults harder as money allocated to lending commitments can’t go into reserves.

Even worse, firms in Europe have even more exposure to energy than U.S. firms in terms of lending commitments. That means if an energy default crisis ramps up in the United States, European banks are going to be out on a ledge, and torn between protecting their bottom line and honoring lending commitments.

The end isn’t anywhere near in sight.

Action to Take: Many energy investors are seeing the sector as a blood-in-the-streets opportunity. And certain parts of the oil industry continue to do well. Pipelines, for example, have caught the eye of Warren Buffett, and our editors here at StreetAuthority. But banks with energy exposure are different. It’s less a blood-in-the-streets opportunity than a cancer-in-the-system screening.

You should immediately audit your portfolio for banks holding a large amount of oil debt. JPMorgan Chase, for example, holds about $14 billion in oil loans, 40% of which is in unrated or below investment grade. But smaller, regional banks could be even more at risk. Moody’s has warned of a potential downgrade for four regional banks with out-sized exposure to oil debt.

•    BOK Financial Corp. (Nasdaq: BOKF)
•    Hancock Holding Co. (Nasdaq: HBHC)
•    Cullen/Frost Bankers, Inc. (NYSE: CFR)
•    Texas Capital BancShares Inc. (Nasdaq: TCBI)

According to Moody’s report, these four banks have a ratio of 90% for outstanding loans to tangible common equity.

In other words, Moody’s thinks the high concentrations of energy loans makes the banks vulnerable to asset quality deterioration. If oil prices remain low, these banks assets could lose even more value.

The long and the short of it is this: Energy losses won’t be contained within the energy system, and banks with large exposure to energy credit and loans will suffer right alongside the oil industry.

Check your portfolio.

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