Ari Levy in Bloomberg:
More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.
The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.
The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized” by regulatory standards, which means they’re considered financially sound.
This analysis from Bloomberg is based on some fairly modest economic assumptions. Most of the banks in question are state and regional banks that have not enjoyed the largesse of the Fed and Treasury like the free-spending, Wall Street money center banks, who are sharply curbing lending and raising rates on credit cards and other revolving debt aggressively even for customers with excellent credit and no history of non-payment.
As you might suspect, even the worst of the banks with large percentages of non-performing loans all claim to be ‘well capitalized’ by regulatory standards.
If as indicated more of the smaller banks fail, we will be left with a few, larger, more potentially lethal financial institutions.
The Obama Administration policy decisions, particularly the programs and reserves decision enabled in October 2008, appear to be favoring Wall Street heavily, monetizing debt for the Primary Dealers and the Wall Street market players, while choking off the consumer and the state and regional banks.
Policy decisions have impact, especially when they have the weight of the Federal Reserve, the Treasury, the Congress, and a powerful President behind them. The question becomes are they the right policy decisions? How were they crafted?
Floyd Norris in the NYT:
Robert E. Lowder believed in growth. He steered his bank into areas where the population was rising rapidly, acquiring dozens of small banks in states like Florida and Nevada. He then accelerated that growth with generous lending to builders. His bank made it a point to raise its dividend to shareholders every year.
Now it all is tumbling down. It appears that Colonial BancGroup, which Mr. Lowder started with the acquisition of a small bank in Alabama in 1981, may soon become the largest bank failure of 2009, with more than $25 billion in assets. Alabama regulators have raised the possibility the Federal Deposit Insurance Corporation may take over Colonial.
Even worse, the bank’s attempt to obtain a federal bailout has prompted a criminal investigation. After a raid requested by the inspector general for the government’s Troubled Asset Relief Program, Colonial said it was being investigated on suspicion of accounting fraud.
If Colonial does fail, it will call into question both the effectiveness of the regulation of rapidly growing banks, and of the capital standards regulators use. Even now, Colonial claims to be adequately capitalized. As recently as March, it met the criteria for being “well capitalized,” the highest designation.
As I noted last night, court records indicate the FDIC issued a new Cease & Desist order to Colonial on August 11th. Among other restrictions, this new order required pre-approval of all “material transactions” – very rare.
Daniel Indiviglio at The Atlantic:
There’s an even more important reason not to worry. I highly doubt banks who hold these bad assets will see anywhere near 100% losses on those loans. In other words, if a bank has 5% toxic loans, and they incur 50% losses, then the bank only needs a 2.5% equity cushion to be okay. Even bad loans are generally not worthless. Most of them are for real property somewhere. That property’s value has likely taken a huge hit in the current market, but it’s not suddenly all worthless.
The government can also still bail these banks out. And if faced with a hundred more bank failures and possible collapse of the FDIC, it probably would. As some banks pay back the government that cash goes into a recycle bin — not a trash can. The Treasury can then reuse it to save some of these smaller banks by bringing their capital ratios back up to required levels.
But don’t get me wrong: Bloomberg’s findings are ugly, and some banks will fail. Bloomberg is also right that if these banks all fail, then it would be very, very bad. I’m just not ready to panic quite yet. If Bloomberg wants to scare me, then it needs to show that the equity cushion all these banks have in place is smaller than the likely losses on their portion of nonperforming loans. That’s not what this article does.
Lita Epstein at Daily Finance:
This report gives credence to the Congressional Oversight Report issued earlier this week, which indicated that many banks are still at risk if their toxic assets are not taken off the books. Large commercial loans are the primary threat to smaller banks. As owners of shopping malls, hotels and offices default on loans more rapidly, the smaller banks that hold many of these loans will suffer. Experts think that the bottom for the commercial real estate market is still three years off. Meanwhile, delinquency rates on loans doubled in the past year to 7 percent. The Federal Reserve expects more companies to downsize and more retailers to close their doors, leaving office and retail space vacant.
The Congressional report said that small banks “will need to raise significantly more capital, as the estimated losses will outstrip the projected revenue and reserves […] Failure to start the Legacy Loan Program raises concerns about Treasury’s strategy.
About 2.6 percent of the $7.74 trillion in bank loans outstanding in the U.S. were nonaccruing, according to data from the FDIC. That’s the highest rate in 17 years. The normal average for nonaccruing loans is 1.54 percent, and the last time that the rate approached this level was during the savings and loan crisis, when 3.27 percent of loans were nonaccruing.
Joe Weisenthal at Clusterstock
Around The Sphere 