Trouble Ahead for Community Banks

The nation’s small and medium-sized banks – those with under $10 billion in assets – could see a spate of commercial loan failures in coming years, according to a report issued by the Congressional Oversight Panel as part of its supervision of the Troubled Asset Relief Program (TARP).  The panel’s chair, Harvard law professor Elizabeth Warren, is “deeply concerned” that commercial loan losses could destabilize many smaller banks – which account for nearly 50 percent of all small business loans.

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, is especially troubled about the interaction among bank lending, small business employment and commercial real estate values.  According to Lockhart, a significant amount of CRE exposure is concentrated at smaller institutions, which carry almost half of total CRE loans.  Small firms’ reliance on banks with heavy commercial real estate exposure is considerable.

The Wall Street Journal counters the pessimism by pointing out that a decrease in unemployment and easier credit for developers could mitigate the losses, thus easing the pressure on real estate developers and other businesses trying to make their payments.  On the other hand, Dr. Gary Shilling, president of A. Gary Shilling & Company, an investment advisory services company, is urging his clients to avoid regional and community banks.  He expects that many more banks will fail, but notes that the Obama administration “is extending the Troubled Asset Relief Program to them and is using other techniques to keep them, as a group, intact.”