WHILE THE NATION's largest banks have been bolstered by federal bailout funds and equity-raising efforts, many smaller banks are still struggling with balance sheets tainted by bad commercial real estate loans.
A total of 98 banks have failed in 2009, as of mid- October. The FDIC recently noted that “de novo” banks, those opened in the last seven years, make up a disproportionate amount of these failures. In total, 21 percent of bank failures since the beginning of 2008 were de novo banks—but from 2000 to 2007, those banks represented only about 10 percent of all failures.
So in late August, the FDIC issued new rules for young banks, subjecting them to higher capital requirements and more frequent exams for their first seven years in operation, up from three years previously. In the fall, the Obama administration developed an initiative to dole out TARP funds to community banks to help stave off further bank failures.
“The regulators were partially culpable for looking the other way as far as banks bulking up on real estate,” says Charles Krawitz, a senior loan sales asset manager at Cincinnati-based Fifth Third Bank. “But the government is trying to keep alive as many lenders as possible.”
The FDIC said in late August that its watch list of troubled banks numbers 416, up from 305 in March. In the second quarter, 111 lenders were added to the list, swelling the list to a 15-year high.