Here is a great piece on the story behind the story in the banking sector.
That’s because according to the data, over 600 smaller banks would have failed the same stress test given recently to the mega-banks.
On top of that, a falling commercial real estate market could deliver losses that are simply too big to for many of them to absorb.
From the Wall Street Journal by Maurice Tamman and David Enrich entitled: Local Banks Face Big Losses
Commercial real-estate loans could generate losses of $100 billion by the end of next year at more than 900 small and midsize U.S. banks if the economy’s woes deepen, according to an analysis by The Wall Street Journal.
Such loans, which fund the construction of shopping malls, office buildings, apartment complexes and hotels, could account for nearly half the losses at the banks analyzed by the Journal, consuming capital that is an essential cushion against bad loans.
Total losses at those banks could surpass $200 billion over that period, according to the Journal’s analysis, which utilized the same worst-case scenario the federal government used in its recent stress tests of 19 large banks. Under that scenario, more than 600 small and midsize banks could see their capital shrink to levels that usually are considered worrisome by federal regulators. The potential losses could exceed revenue over that period at nearly all the banks
The findings are a stark reminder that the U.S. banking industry’s problems stretch far beyond the 19 giants scrutinized in the government stress tests. Regulators and investors have focused on too-big-to-fail banks such as Bank of America Corp. and Citigroup Inc. But more than 8,000 other lenders throughout the country are being squeezed by the recession and real-estate crash.
“They are in just much worse shape” than the big banks, says Terry McEvoy, an Oppenheimer & Co. analyst who reviewed the Journal’s analysis. “There is a lot less earnings power at these banks.”
The Journal projected potential losses by using the “more adverse” scenario in the government’s stress test — the scenario the Fed used to calculate how much capital the big banks should raise. That worst-case hypothetical situation includes a 2010 unemployment rate of 10.3%, compared with 8.9% in April, and a two-year cumulative loss rate of as much as 12% on commercial real-estate loans and as much as 20% on credit cards.
Under the loan-loss assumptions used in the Fed’s stress tests, Synovus Financial Corp., a Columbus, Ga., bank-holding company, could face losses of as much as $3.4 billion through 2010, according to the Journal’s analysis. About two-thirds of the estimated losses are from commercial real-estate loans, which Synovus barreled into when the economy was booming, especially in the Atlanta area. Synovus last year got $968 million from TARP, keeping the bank well above what it needs to be considered “well capitalized” by banking regulators. But the company’s estimated losses could far exceed its revenue by the end of next year, consuming all of its capital, the analysis shows.
“From a straight math exercise, we can’t disagree with you,” says Thomas Prescott, Synovus’s chief financial officer, although he notes he isn’t “endorsing” the Journal’s projections.
At 923 of the 940 banks examined by the Journal, estimated losses under the federal government’s worst-case scenario would exceed bank revenue projected by the analysis. At 634 banks, the gap would be large enough to reduce capital below the level considered comfortable by regulators, unless the banks can somehow steady themselves. (Emphasis mine)”
By the way, according to the FDIC, 61 banks have failed since the housing bubble burst. Let’s hope they have enough funds to cover all of the new ones that headed down the pike from here.
Related Articles:
The Black Swan: Crisis is “vastly worse” than the 1930’s
Roubini claims stress tests are “too optimistic”
The Banks Stress Over the Stress Tests
The Great Depression’s Ben Bernanke
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