While the fed report indicates our banking system can further endure a recession (pass the stress test), there is still a river full of troubled waters ahead for many. For starters, banking system discussions by the government have largely focused on big institutions with little or no information shared regarding smaller banks. But more than 150 small and medium-sized U.S. banks are currently failing and expected to close by the fourth quarter as bad commercial real estate loans threaten their viability. These smaller banks are often the lifeblood of the communities they serve and their closure will most definitely have a profound impact on the local businesses they serve.
Of the nation’s 8,390 banks, 7,635 of them are classified as “small” or holding assets worth less than $1 billion. Over a third of these smaller banks, or 2,562, are carrying disproportionately high levels of commercial real estate loans, amounting to three times their core capital. The majority of these loans are construction related and were issued in the last 2+ years as commercial development growth exploded.
According to several analysts, most small community banks’ exposure is even greater that that of large regional banks who are more diversified, avoiding heavy concentration in one type of lending. Compounding the problem is the fact that the size of a commercial loan can be many times greater than that of a residential loan.
Commercial construction loan delinquencies shot up from 6.6% in the fourth quarter to 8.9% in the first quarter of 2009. The expectation is that the default rates will continue to rise significantly over the course of the third and fourth quarters and in 2010, as maturity dates come and go. So get out your canoe and get ready to paddle upstream!
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