With the American second quarter reporting season ahead, the big US banks will grab the limelight with solid profits for the second quarter in a row.

Big profits from bond deals, trading and their own multi-billion dollar share issues in May and June (after the stress tests) will guarantee headlines — but are likely to be be horribly misleading.

In fact the sharemarket performance of the US banking sector has cooled in the past six weeks or so in the wake of the stress tests. Citibank, Bank of America, Morgan Stanley, Goldman Sachs and JPMorgan are dominating the aid from either the Government, or from the special funding arrangements and low interest rates on offer from the Fed.

But for more and more of their smaller brethen in America’s heartland, there are headlines for the wrong reasons. The crisis among America’s small regional and local banks seems to be deepening with seven going bust late last week.

Three banks failed two weeks ago, five the week before last and then seven ahead of the holiday weekend. That took the tally of failed banks for this year to 52, more than double the 25 failures in 2008. Three failed in 2007

Six of the failures were in Illinois. The Chicago Tribune reported that the Illinois banks were controlled by “the Campbell family, whose Campbell Group operates nine banks in Illinois.

“Founders Bank had gone on a search to try to raise about $50 million in capital after suffering securities losses in the first quarter and falling to an “undercapitalized” status,” the paper reported. “The failure of these banks resulted primarily from losses related to the banks’ investment in collateralized debt obligations and other loan losses,” the FDIC said.

It was a reminder that the subprime crisis and its creatures, CDOs still have the power to consumer banks and balance sheets.