How bad does it look for the nation's small and midsized banks?
Pretty bad if you glance at the headline of Tuesday's Wall Street Journal. An in-house stress test by the paper attempting to mimic the tests conducted by the Federal Reserve Board on the 19 largest bank holding companies found that, assuming the Fed's worse-case economic scenario, losses could top $205 billion at 940 smaller banks by the end of next year. Losses of that magnitude would leave 634 of the measured banks below the 4% Tier 1 common equity ration the federal government has asked the big banks to maintain. The largest component of those projected losses would be commercial real estate, at $100 billion; next would be general commercial and industrial, or C&I, loans at $29 billion.
That's the worse-case scenario, though. Much further down in the story the Journal acknowledges that if the consensus predictions of major economic forecasters come to pass, a level also measured by the Fed tests, losses would be less than half the worse-case scenario at $92 billion. Under that scenario, only 185 banks would need more capital to meet the government's target level.
It's important to remember, though, that the stress tests were not meant to be forecasts of how much banks will lose over the next year, but simply a way to determine how much capital banks would need to prepare for a possible further erosion of the economy. Given that, the $205 billion loss prediction would appear to be overstated.
Still, the latest Fed numbers give some credence to the notion that regional and smaller banks are not fully acknowledging the depth of their problems. Commercial real estate and C&I are the other shoes many have been waiting to drop on the banking industry following the collapse of the housing market.
And, according to the Fed, delinquency rates are rising significantly on commercial real estate and C&I loans at smaller and regional banks, but they are booking failure at a slower pace. For instance, delinquent commercial real estate loans at banks smaller than the top 100 institutions rose from 5.56% for all of 2008 to 6.39% through the end of first quarter 2009. Charge-off rates for those loans, however, fell from 1.85% to 1.25%. Similarly, C&I delinquencies rose from 2.81% to 3.25%. Charge-offs, however, remained even at 1.36%. - Bill McConnell
See story from The Wall Street Journal
See earlier story from Dealscape
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