New Crisis Threatens Healthy Banks

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The Washington Post has a story on regional and healthy banks that I highly recommend. Essentially, we are past the first wave of writedowns and are moving into phase two where it won’t be about derivatives and RMBS’s as much as underlying loan losses and collateral damage in commercial property and construction loans. In the U.S., this puts the regionals front and center

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The one and only reason I would support bailouts or nationalization of mortgage debt is because of systemic risk. I am very dubious on the bailout plans presented to date.

Ultimately, when good companies go down with the bad, as happens in a recession, it is a shame. But, there comes a point when systemic risk threatens to paralyze an economy. It is still early days. Nevertheless, we should keep this in mind as the credit crisis unfolds.

Increasing struggles by consumers and businesses to make payments on a variety of loans, not just mortgages, are setting off a new wave of trouble in the financial sector that is battering even institutions that had steered clear of the subprime-home-loan debacle.

Late payments on home-equity loans are at a record high, according to fresh data from the Federal Deposit Insurance Corp. The delinquency rates on loans for cars, small businesses and construction are spiking to levels not seen in a decade or more.

Unlike last year, when soaring mortgage defaults sparked a crisis of confidence in the financial system, the root of these problems is the downturn in the broader economy. Simply put, consumers and businesses are strapped for cash with job losses growing and retail sales falling, economists said.

“We are not finished with the mortgage problem, but you are starting to see increased delinquencies in other forms of consumer debt,” said Paul Kasriel, an economist at Northern Trust Securities. “We are in the eye of the hurricane. We had the first wave of the credit crisis, and it was quite damaging. But there’s another wave coming, and it’s likely to be as destructive.”

The institutions most at risk in this new phase of the credit crisis are regional and local banks, many of which stayed away from subprime mortgages. These firms are key drivers of economic activity in communities across the country. Without them, consumers would lose a source of personal loans. Small businesses would struggle to stay afloat. Construction companies often can’t finance local projects without these banks.

Because they have fewer options than big Wall Street firms for raising emergency funds, these regional and local banks tend to be more vulnerable in a crisis.

In the Washington area, the stock prices of several local banks have already plummeted, with shares of Virginia Commerce Bank falling nearly 50 percent and Alliance Bank dropping about 45 percent since the beginning of the year.

Washington Post, 22 Jun 2008

See: Credit Crisis Timeline for a full list of writedowns and capital raising by institution and a timeline of the credit crunch.

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