Massive Bank Failures Due, Says Oversight Panel

Massive Bank Failures Due, Says Oversight Panel
02-27-2010
Source: Epoch Times

Close to 3,000 banks are currently classified as having a risky concentration of commercial real estate loans, according to a recent report by the Congressional Oversight Panel (COP). All of them are small to mid-sized banks, already weakened by the financial crisis.

The COP is “deeply concerned” that commercial real estate losses could jeopardize the stability of these banks and the damage will contribute to prolonged weakness throughout the economy, according to chair Elizabeth Warren.

About $1.4 trillion in commercial real estate loans are due for refinancing between now and 2014. “In today’s market, many applications will be turned down,” Ms. Warren said on a video posted on COP's Web site.

Property values have fallen 40 percent on average, and banks are unwilling to refinance; many wanting a lower loan-to-value ratio, which will trigger lot of foreclosures.

“Some loans were flat-out reckless when they were made and never should have been financed,” Warren said. Banks could suffer losses of up to $200 to $300 billion, the report said.

“A big enough wave of commercial mortgage defaults would trigger economic damage that would touch the lives of every American,” Warren said.

Empty offices, empty hotels, and empty stores could lead directly to job losses, and banks could fear lending. The largest loan losses are projected for 2011 and beyond. But the stress tests conducted on big Wall Street banks last year examined their stability only through 2010, the COP report states.

“Even more significantly, community banks tend to hold much greater concentrations of commercial real estate than big Wall St. banks. But community banks never underwent any stress tests at all,” Warren said.

Nearly 3,000 community banks (that’s nearly 40 percent of all banks in the United States), have a very high proportion of commercial real estate on their books and are at particular risk of being overwhelmed.

These are the same banks that provide loans to small businesses that create jobs and boost productivity.

“If hundreds of community banks go under, the effect could be to dump sand in the gears of our economic recovery,” Warren said.