Tuesday, March 9, 2010

Crying Wolf? The Statistics behind the Growing Concern about Commercial Lending Credit Quality

A Congressional watchdog group reported recently that over the next few years, a wave of commercial real estate loan failures could threaten the U.S. financial system, and in the worst-case scenario, hundreds of additional community and mid-sized banks. FDIC Chairwoman Sheila Bair recently told reporters that “Troubled institutions are now at extremely high levels; 702 institutions or almost 1 out of 11 are troubled. These institutions are likely candidates to fail over the next 6 to 12 months.” Also, "This year, the losses are going to be heavily driven by commercial real estate, we've known for some time and we have been projecting that."

Recent FDIC Statistics on Banking support the concerns about commercial real estate (CRE) losses, and more broadly, commercial and industrial loan losses. The chart below shows the percentage of noncurrent loans and net charge-offs as a percentage of total loans.

Little attention is being paid to commercial and industrial (C&I) loan problems. Outstanding C&I balances at US commercial banks exceed CRE balances. Bad C&I loans increased 517% from 2006 to 2009. During the same period, bad CRE loans increased 608%.

Four banks failed last week, bringing the 2010 total to 26. Commercial real estate problems were cited in many of the closures. A slow economic recovery, coupled with continued high unemployment, supports the National Association of Realtors’ prediction that there will not be any meaningful recovery in commercial real estate before 2011.

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