CT Blue

Here we go again. Pro Publica reports that the next financial meltdown is coming to a community bank near you, particularly if you live in an area that has seen a lot of development in the past few years.

…small banks are suffering from a wave of defaults on construction and development loans that could cause dozens more to succumb in the year ahead.

As with the subprime meltdown, Sun Belt states are likely to be the hardest hit: Georgia, Florida, the southwest and California. In a worst-case scenario, the FDIC insurance fund, which stood at $34.6 billion in the third quarter of 2008, could run out and require a taxpayer bailout. The government’s bailout program has so far invested about $230 billion in 290 banks — the lion’s share of it to large banks — and there’s talk of another round.

“A significant portion of the U.S. banking system is overexposed to commercial real estate,” says bank analyst Gerard Cassidy of RBC Capital Markets. Federal Reserve data show commercial real estate loan delinquencies growing nearly fourfold between the first quarter of 2007 and the third quarter of 2008. Smaller banks, like Silver State, are at particular risk. Analysts Oppenheimer and Co. issued a report in November concluding that banks with total assets below $1 billion have, on average, 26 percent of their loans related to commercial real estate. For banks with assets above $1 billion that figure is only 11 percent.

Cassidy has estimated that 200 to 300 more banks are in danger of being closed. If so, it would be the biggest spate of financial institution failures since the savings and loan crisis, when more than 1,000 banks and S&Ls shuttered in 1988 and 1989. Just as today, the inability of developers to repay their commercial development loans played a major role.

The usual suspects are once again involved. Greedy bankers, and of course, Bush non-regulators:

Three years ago, federal regulators recognized that banks were amassing big concentrations of commercial development loans and lowering lending standards at the same time. Their response was to issue a mild warning: Take steps to reduce the risk from such loans, or face increased supervision and requirements to raise capital that could serve as a bulwark against potential losses.

Though far from a crackdown, even that mild guidance was too much for banks. Thousands of industry comments poured in objecting to the regulators’ intrusion, and the FDIC and other agencies backed off, clarifying that they didn’t intend to impose limits.

Donald Isken, a Delaware attorney who specializes in commercial real estate law, said today’s rise in defaults on commercial development loans speaks for itself. “Obviously, (the rules) were not strict enough,” he said. “It’s just a fact.”