The Fed and other bank regulators eye commercial loans

Discussion in 'Wall St. News' started by ASusilovic, Sep 16, 2009.

  1. WASHINGTON (MarketWatch) -- Increasingly worried about the health of mid-sized regional banks with less than $100 billion in assets, the Federal Reserve is working on an expansive review of the commercial real estate loan portfolios of these banks, with expectations that large losses in this asset category could still be coming, according to people familiar with the central bank.

    The Fed and other bank regulators are concerned that large regional mid-sized lenders have commercial loan portfolios that have started to deteriorate -- with the largest losses still to occur.

    The Fed is expanding its review of commercial loans at these regional banks as part of its existing supervisory process, according to a person familiar with the central bank. She added that the Fed is consulting with other regulators as part of this fact-finding mission.

    The central bank is conducting the review, in part, because of lessons learned from stress tests the government conducted on the largest 19 financial institutions in May.

    The government employed a controversial pessimistic forecast to evaluate whether the 19 largest banks needed to raise capital today to prepare for a gloomy economic future. However, this expanded review will not be a stress test, but it is expected to become a routine part of the Fed's approach, she said.

    The Fed plans to examine commercial loans in categories to identify trends in potential losses. Hotel, retail and commercial construction loans are examples of the kinds of categories the central bank will be analyzing.

    As part of the examination, some banks are being asked to perform a commercial real estate analysis of their assets, according to one banking attorney who said a client of his has been asked to conduct such a review.

    Too slow in tackling the problem?
    Elizabeth Warren, the chief of the Congressional Oversight Panel, which is charged with overseeing the $700 billion Troubled Asset Relief Program, or TARP, has been pushing the Treasury to take steps to reign in problems with toxic commercial and mortgage loans.

    The panel released a report in August that suggests that whole loan, individual commercial, multi-family or residential mortgages pose a threat to smaller public banks, those with $600 million to $100 billion in assets. The report also takes issue with the Treasury department's decision to delay indefinitely a program to buy toxic whole loans from banks.

    On Wednesday, the FDIC announced a first-ever toxic mortgage deal, with mortgage-company Residential Credit Solutions paying $64 million in cash for a 50% stake in a new company formed to take a pool of mortgages off the books of insolvent Franklin Bank. See full story.

    Jaret Seiberg, analyst at Concept Capital in Washington, said he believes that bank regulators are worried about the financial health of mid-sized banks, with $10 billion to $100 billion in assets, which tend to have high concentrations of commercial real estate and construction loans, which leave them exposed to future losses.

    "This is about losses and solvency," Seiberg said. "We do not conduct equity analyses of these banks, but we believe regulators expect more failures in the coming quarters. In our view, some investors may not fully appreciate how bearish regulators are right now about mid-sized banks."

    Seiberg added that Concept Capital has identified about 45 publicly traded banks that have between $10 billion and $100 billion in assets.

    He added that even though many of the banks have attractive franchises, it is unlikely any other bank will make a bid to buy them because of the depressed market situation.

    "We doubt any bank will bid for a troubled mid-sized bank when they know they could buy the branches and deposits from the FDIC once the troubled bank fails," he said. "The buyer could work out a loss-sharing agreement with the FDIC to limit its downside risk on assets
  2. green shoots