The big news in banking in the past week was Bank of America paying back it’s TARP loans. However, if your regional bank is in the TARP program, do not expect it to get out of it for a good long time.
The main reason is, real estate loans. The local banks stopped being the financier of choice for local businesses. Those loans had too much risk and work to them. Instead the local banks essentially became real estate banks.
And now they are under the gun as both their residential and commercial real estate portfolios are under pressure. That is why the failures have been mostly local banks and why real estate lending has dried up. These banks are so overextended that they are just trying to ride out the crisis and not absorb any more risk.
Unpaid loans on malls, hotels, apartments and home developments stood at a 16-year high of 3.4 percent in the third quarter and may reach 5.3 percent in two years, according to Real Estate Econometrics LLC, a property research firm in New York. That’s a bigger threat to regional banks, which are almost four times more concentrated in commercial property loans than the nation’s biggest lenders, according to data compiled by Bloomberg on bailout recipients.
The concentration makes regulators less likely to let regional lenders like Synovus Financial Corp. and Zions Bancorporation leave the Troubled Asset Relief Program, analysts said. Smaller banks would remain stuck in TARP, while bigger lenders, including Bank of America Corp., repay the government and free themselves to set their own policies on executive pay.
“Community and regional banks basically became real estate banks in the past 25 years, and now real estate is on its back,” said Jeff Davis, an analyst at FTN Equity Capital Markets Corp. in Nashville, Tennessee. “The largest banks have other areas where they can make money, be it consumer lending, capital markets and asset management.” via Bloomberg
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They will be back on government life support here in a few years. Its how the big banks work, they take and take and take money while the times are good, and then they are the first to ask for a handout when they are ailing financially because they are “too big to fail”. Capitalism is dead if we really believe anything is “too big to fail”.
-Tyler