Tuesday, March 4, 2008

The local bank downgrades: Commercial loans cited as culprit

The crisis that is about to overwhelm many local banks was discussed recently (see Just how bad is the situation with local banks?). Community and regional banks are facing significant exposure with their commercial real estate portfolios. Many of the loans to real estate developers and commercial builders are starting to turn sour reflecting the problems with overall market. This is turn has started a rush by the rating agencies to downgrade many of these banks as their financial strength weakens.

Moody’s downgraded a number of regional and community banks over the past week. The ratings agency has cut the outlooks of Associated Banc-Corp (ASBC), Associated Bank NA, Bank of Nevada, Susquehanna Bancshares Inc (SUSQ), Western Alliance Bancorporation (WAL) to negative from stable.

Additionally, the ratings agency cut the financial strength rating of Amegy Bank National Association, First Commercial Bank (FCHI.PK), and Nevada State Bank to 'C+' from 'B-'. While placing Fulton Financial Corp (FULT) rating under review for possible downgrade.

This cycle of downgrades, reflecting the likelihood that commercial real estate loans will not be repaid, is expected to increase over the upcoming months. A good number of these banks will be forced to merge or be bailed out by the FDIC.

Once again, it is very important at this time to pay attention to the financial rating of the institution where you perform your banking. Nothing is more painful than having your money locked up and unavailable for eight months while they FDIC “bails out” your bank or to having all your money above the FDIC insurance limit magically disappear forever.


North Georgia Mountain Real Estate said...

I didn't know that about them holding your money for 8 months. I always look for a FDIC bank but never realized they can hold your money.

GregB said...

The FDIC attempts to merge banks very quickly rather than directly bailing them out. For the past few years with minimal bank failures, most bailouts were done in under three days. Some were done over a weekend with no impact to customers whatsoever.

However in a high bank failure environment like the S&L crisis in the 1980s, the bailouts took a much longer period of time. Many banks could not be merged effectively or quickly. Some were in such bad shape that the only option was to payout the cash to depositors.

During the time that the FDIC is re-organizing a bank, all the funds are frozen. Depositors can not get their money out. Our family had the unpleasant experience of waiting 8 months with our funds frozen for a bailout / merger to occur with a local bank in N.J. during the S&L crisis period. During this time you do not get interest on the money in your checking account and CDs either.

I expect in a high stress bank failure environment the long waiting periods for FDIC action will return. Keep in mind that the FDIC is still doing a very good job in these situations; it is simply that the high number of failures, lack of liquidity, weakness of potential purchasing banks, and other factors will create long waiting periods for bank failures to be sorted out.