The Crack Cocaine of Community Banks

With default rates rising on commercial real estate loans, RBC Capital Markets recently forecast that more than 1,000 U.S. banks may fail in the next three to five years. Most of these bank failures will occur at banks less than $2 billion of assets.

In The Minneapolis-St. Paul Business Journal, it was just noted that "commercial mortgages are being closely watched as another source of pain for the nation’s bankers. At the height of the credit bubble, one industry observer said commercial real estate loans had become the crack cocaine of community banking, reflecting the pace of growth some were achieving with such loans."

Crack cocaine?

Over two years ago, I wrote that bank regulators had issued new guidelines impacting many small and mid size banks to offset concern that too many bank loans were secured by business real estate creating an undue level of risk in bank loan portfolios. Their other concern was whether or not the banks had enough capital to withstand the losses that might result from defaults on real estate loans.

The FDIC shut down 25 banks in 2008 and 9 banks thus far in 2009. It will interesting to see how many more banks bite the dust this year and how many of those were hooked on "crack cocaine".

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Tags : commercial real estate loans , community banks , bank failures , real estate bridge loans