FDIC Forecasts More Bad Loans and Bank Failures

Includes: SPY, XLF
by: Richard Suttmeier

The FDIC finally admits to C&D and CRE loan problems.

I have been warning about overexposures to C&D and CRE loans posing the biggest threat to community and regional banks since April 2006.

This week FDIC Chair Sheila Bair finally bought these risks to the public eye. What took so long?

Even with the warnings, Ms Bair, in making a statement on Capital Hill, incorrectly stated that bank performance lags behind economic recovery. My proof against this thesis is the simple fact that as the FDIC ignored the regulatory guidelines for exposures to C&D and CRE loans while I warning that the FDIC Quarterly Banking Profile was a leading economic indicator.

This data led me to forecast in March 2007 that a multi-year bear market would begin by the end of 2007. FDIC data led me to predict Recession in 2008 / 2009 in March 2007. Data from banks are a leading indicator not a lagging one.

The FDIC expects its non-list of problem banks to increase and for bank failures to remain high for the next several quarters. The FDIC is projecting bank problems to occur at least into 2011. I have been predicting using FDIC data as a leading indicator.

The ValuEngine List of Problem Banks exceeds 750 and we predict 500 to 800 by the time “The Great Credit Crunch” ends in 2011 / 2012 at the earliest.

According to the FDIC “household financial distress has been exacerbated by high unemployment. Employers have cut some 7.2 million jobs since the start of the recession, leaving over 15 million people unemployed and pushing even more people out of the official labor force. The unemployment rate now stands at a 26-year high of 9.8 percent, and may go higher, even in an expanding economy, while discouraged workers re-enter the labor force.” Hard to sustain growth without job creation and the NBER, the arbiter of Recession calls, knows this.

CRE loans headlines problems for community and regional banks. As of the end of June, CRE loans backed by nonfarm, nonresidential properties totaled almost $1.1 trillion, or 14.2% of total loans and leases. Why is it that the regulatory guidelines put in place in December 2006 are never discussed?

The FDIC says:

CRE loans and construction and development loans are a significant examination focus right now and have been for some time. Our examiners in the field have been sampling banks' CRE loan exposures during regular exams as well as special visitations and ensuring that credit grading systems, loan policies, and risk management processes have kept pace with market conditions. We have been scrutinizing for some time construction and development lending relationships that are supported by interest reserves to ensure that they are prudently administrated and accurately portray the borrower's repayment capacity. In 2008, we issued guidance and produced a journal article on the use of interest reserves,as well as internal review procedures for examiners.

Let me repeat – Why didn’t the US Treasury, Federal Reserve and FDIC follow their joint 2006 guidelines?

Since 2006 guidelines were ignored, the problems escalated and now our illustrious banking regulators will soon issue guidance on CRE loan workouts, most likely at tax payer’s expense. The FDIC says, “The agencies recognize that lenders and borrowers face challenging credit conditions due to the economic downturn, and are frequently dealing with diminished cash flows and depreciating collateral values.

Prudent loan workouts are often in the best interest of financial institutions and borrowers, particularly during difficult economic circumstances and constrained credit availability. This guidance reflects that reality, and supports prudent and pragmatic credit and business decision-making within the framework of financial accuracy, transparency, and timely loss recognition.” What a crock of FDIC bunk!

Disclosure: I Hold No Positions in the Stocks I Cover.

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