Thursday, February 28, 2008

Is The Other Shoe Dropping?

Since leaving the banking industry some years ago I have been active selling lending software applications. In the course of that I familiarized myself with the composition of each bank's loan portfolio. In the mid-nineties I began to notice the growth of construction and commercial real estate portfolios. Today it is common for community and even regional banks to have 40% to 60% of their portfolio in these two categories, double what one might have seen 15 years ago. With all of the focus on subprime lending, I have been wondering when it will dawn on folks that the traditional soft spots for bank during economic down cycles has always been in these two real estate categories. Well, yesterday that changed when the New York Times ran an article titled "Small and Midsize U.S. Banks Beginning to Struggle in Credit Crisis". (Click here to go the the article) In the article they express the exposure in terms of such loans in relations to capital with the ratio going from about 150% in 1990 to 285% today. Or, total capital is equal to 35% of such real estate exposure which will not provide much of a cushion if the economic down cycle becomes severe. Adding to this concern is Fed Chairman Bernanke's acknowledgement today that we are headed for an increase in bank failures.

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