Jeff Harding

Slow pace of bank failures holding back recovery

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The Trepp bank failure report confirmed that the problems with banks are mainly with commercial real estate (CRE) (76%) followed by residential real estate (16%). They noted that the number of failed banks in May was way down (5):


Bank Failure Graphic Trepp

Here are their conclusions:

  • For the group of 5 failed banks in May,commercial real estate (CRE) loans comprised $152 million (or 76%) of the total $201 million in nonperforming loans. Construction and land loans made up $109 million or 54% of the total,while commercial mortgages comprised $44 million (22%) of the total nonperforming pool.
  • The residential real estate loan category was second,with $31.4 million in nonperforming loans,or 16% of the total nonperforming balance.
  • The remainder was comprised of C&I loans ($5.8 million,3% of the total) and consumer and other loans ($11.1 million,6% of the total).
  • Three of the failures occurred in the Southeast – 2 in Georgia,and 1 in Florida. Two of the failures occurred in the West,in the state of Washington.
  • Georgia continues to lead the country in bank failures,with 12 year-to-date in 2011,and 64 since the cycle started in 2007.
  • Florida ranks second for bank failures,with 5 failures year-to-date in 2011,and 50 since 2007.
  • The closures in Washington represent the first in the state during 2011,following an active 2010,when regulators shuttered 11 banks there.
  • All the failures in May involved loss-sharing by the FDIC,with 73% of the assets acquired being covered by loss-sharing. The proportion of loss-share assets is up from 67% in April.
  • We believe the prevalence of loss-sharing indicates that buyers continue to exercise caution in failed bank acquisitions.
  • As of 1Q 2011,there are more than 200 banks on the Trepp Watch List with a Failure Risk Score of 8 or higher. [The banks closed in May all had scores of 10.]

What this tells us is that there is still a long way to go before we see a solid recovery. We know that the massive overproduction of CRE and residential real estate is doing two things:

  1. Clogging the balance sheets of regional and local banks,the main lenders to small and medium business enterprises (SMEs);and that
  2. Will lead to more bank failures as marginal institutions in the most overbuilt areas fail to raise capital sufficient to meet new capital requirements.

One thing that Alan Greenspan seemed to understand is the above problems will delay recovery as long as they exist. He set up the famous Resolution Trust Corporation (RTC) that took assets from failed institutions (mostly S&Ls back then) and wholesaled them out. While I am not an advocate of more government intervention, quicker FDIC action and a similar RTC solution would go a long way to speeding up a recovery. But, that is only one chink in the recession/depression armor.

In a previous article I noted the problem with SMEs laggardly demand for credit has a lot to do with the fact that these business owners are also substantial CRE investors. They have enough problems:

Moody's CRE Index Mayo 2011

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Published by kind permission of Jeff Harding.
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