Most of the so-called experts have consistently underestimated the fallout from the Great Unraveling.
In the beginning, for example, there was plenty of talk -- from central bankers, politicians, Wall Street "strategists," and media pundits -- that the losses would be "contained" to a small corner of the lending universe. Of course, those Pollyanaish views were completely wrong.
Then, with each successive wave of bad news -- one credit market after another seizing up, the housing market jump-shifting from ski-slope-drop to death-spiral-collapse -- those who should have known better kept arguing that "the worst was over." Again, they were clueless.
With that in mind, I feel pretty confident that the concerns expressed in the following Financial Times article, "Regulator fears wave of bank failures" which many might see as extremely troubling, actually represent the best case scenario going forward.
US bank failures could rise above "historical norms" as a weakening economy puts pressure on badly underwritten loans, particularly in commercial real estate, according to a bank regulator.
In an interview with the Financial Times, John Dugan, who oversees about 1,700 national banks as comptroller of the currency, said the growing problems for lenders follow a period of almost four years in which no institution regulated by his agency had failed.
"We're going to have some more bank failures that will come back more to historical norms and may go above that with time," he said. "That is a natural consequence of the economy going from historically exceptionally benign credit conditions to something that is more normal to something you would get in a downturn."
Mr Dugan's comments come as US banks report big spikes in reserves for expected losses on consumer and small business loans, reflecting the spread of the credit crisis from Wall Street to the broader economy.Yesterday, Atlanta-based SunTrust (NYSE:STI) said profit fell by nearly half to $283.6m as provisions rose 10-fold to $560m. Ohio's Fifth Third (NASDAQ:FITB) bank said profits fell 19 per cent to $292m as provisions rose to $544m from $84m last year.
The largest US banks, including Citigroup (NYSE:C) and Bank of America (NYSE:BAC) , have also seen loan losses increase as more consumers fall behind on home equity, credit card, automotive and other consumer loans. The banks have been rushing to raise capital to offset loan losses and writedowns on mortgage-related securities.
Mr Dugan's Office of the Comptroller of the Currency is particularly worried about lending by smaller banks to commercial real estate developers for condominiums and other projects. More than a third of smaller community banks have made commercial property loans that exceed 300 per cent of their capital, the OCC says. By comparison, in 1987, when hundreds of banks failed amid a commercial property collapse, such banks had commercial property loans equal to 175 per cent of their capital.
Mr Dugan said he did not expect failures to rise as high as during the late 1980s and early 1990s - when 534 banks failed in 1989 alone - because banks are better capitalised, have better underwriting standards and did less speculative lending.
"Banks are better capitalised going into this...but the flip side is they are more concentrated," he said. "Part of it depends on the depth of the downturn and duration of the downturn."
Last year, three US banks failed. In January, Douglass National, a Missouri bank with $58.5m in assets, became the first OCC-regulated institution to fail since March 2004. At the end of 2007, there were 76 institutions on the problem bank list of the Federal Deposit Insurance Corporation, the highest since 2004. That compares with 2,165 banks on the watch list in 1987.
"More than a third of smaller community banks have made commercial property loans that exceed 300 per cent of their capital"
and
"Mr Dugan said he did not expect failures to rise as high as during the late 1980s and early 1990s ... because banks are better capitalised, have better underwriting standards and did less speculative lending."
Small banks lent masively beyond their means in speculative commercial real estate. How does Mr. Dugan conclude otherwise?
Posted by: Jes | April 24, 2008 at 01:10 PM