Bank Back Breaker

The WSJ has analyzed 940 smaller and local banks using the Fed's worst-case stress scenario, and has come up with devastating news: nearly two-thirds of them would require additional capital under the same rules the Fed set up for the big banks, and the source of those losses would be the crumbling commercial real estate sector (emphasis mine)

Commercial real-estate loans could generate losses of $100 billion by the end of next year at more than 900 small and midsize U.S. banks if the economy's woes deepen, according to an analysis by The Wall Street Journal.

Such loans, which fund the construction of shopping malls, office buildings, apartment complexes and hotels, could account for nearly half the losses at the banks analyzed by the Journal, consuming capital that is an essential cushion against bad loans.

Total losses at those banks could surpass $200 billion over that period, according to the Journal's analysis, which utilized the same worst-case scenario the federal government used in its recent stress tests of 19 large banks. Under that scenario, more than 600 small and midsize banks could see their capital shrink to levels that usually are considered worrisome by federal regulators. The potential losses could exceed revenue over that period at nearly all the banks analyzed by the Journal.

The potential losses on commercial real estate are by far the largest problem facing the midsize and small banks, easily exceeding losses on home loans, which could total about $49 billion, according to the Journal's analysis. Nearly one-third of the banks could see their capital slip to risky levels because of commercial real-estate losses, the Journal found.

The Journal, using data contained in banks' filings with the Federal Reserve, examined the financial health of 940 small and midsize banks. It applied the loan-loss criteria that the Fed used in its stress tests of the largest banks.

The findings are a stark reminder that the U.S. banking industry's problems stretch far beyond the 19 giants scrutinized in the government stress tests. Regulators and investors have focused on too-big-to-fail banks such as Bank of America Corp. and Citigroup Inc. But more than 8,000 other lenders throughout the country are being squeezed by the recession and real-estate crash.

If you figure that two-thirds applies to the other 7,000 banks out there, that's a good indication that the secondary wave of CRE and unemployment-based forclosures are going to devastate the financial industry across the board over the next 12 to 18 months.

Thousands of small-to-medium banks are in potential trouble. Who will bail THEM out when they get swamped by commercial real estate losses?

The second half of the hurricane is coming.