Small Banks Face Trouble, Too

Wall Street Journal (03/03/08) P. C2; Corkery, Michael; Lei, Lingling
Smaller banks are feeling even more of a pinch than their larger counterparts from the collapse of the housing market due to the big bets they placed on construction loans to home builders. As a result, many are now saddled with accumulating portfolios of delinquent loans and are facing increased pressure from regulators to hedge these distressed loans. Those banks that are not properly diversified or that lack sufficient capital in reserve are most likely to fail in the months ahead. RBC Capital Markets analyst Gerard Cassidy estimates that as many as 150 banks nationwide, mostly smaller ones, could go under in the next few years because of their exposures to commercial property loans alone--a category that typically includes loans to home builders. The Office of the Comptroller of the Currency reports that the amount of commercial property loans as a percentage of community banks' remaining capital has almost doubled to a whopping 285 percent over the past six years.