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CD signs of stress
Other lenders are already in more dire straits.
IndyMac Bancorp, a large savings and loan institution and a leading mortgage lender, is one of Cassidy's biggest concerns, with a whopping Texas Ratio around 140%.
IndyMac is finding it much tougher to package up and sell the mortgages it originates in securitizations. That used to be a major source of new money for the company to turn around and use in further lending.
When lenders need to raise new capital, they can try to boost deposits by offering attractive interest rates on certificates of deposits, or CDs.
IndyMac is currently offering the highest rates on one-year CDs, according to Bankrate.com. Others in the top 10 include Corus Bankshares , Imperial Capital Bancorp and GMAC bank.
When Countrywide Financial was struggling last year, its federal savings bank unit began offering some of the highest CD rates in the U.S. to build deposits.
Bank of America has since agreed to acquire Countrywide and it didn't make it onto Bankrate.com's list of top 10 CD rates this week.
"These banks that are challenged for liquidity are having to go out and pay up in the market for CDs," Joe Morford, a colleague of Cassidy's at RBC, said.
Imperial Capital stopped paying dividends earlier this year. GMAC, owned by leveraged buyout giant Cerberus Capital Management and General Motors (GM
General Motors Corporation, is struggling to keep its Residential Capital mortgage business afloat.
Corus, offering the fifth-highest rates on one-year CDs, had a Texas Ratio of nearly 70% at the end of the first quarter, up from 9.1% in 2006, according to Morford.
Construction loan destruction
Corus is also highly exposed to types of loans that some experts worry will be the next major source of losses for banks after the mortgage meltdown.
Construction and development, or C&D, loans made up 83% of the Chicago-based bank's total loans at the end of 2007, according to RiskMetrics Group.
This type of loans helps to pay for things like the building of real-estate development projects and the construction of office buildings.
Small and medium-sized banks found it difficult to compete with large lenders in the national markets for mortgages and other consumer loans. So many focused on C&D loans because this type of financing relies more on local, personal connections, said Zach Gast, financial sector analyst at RiskMetrics.
As the real estate market boomed, C&D loans did too. A decade ago, bank holding companies had $60 billion of these loans. That number is now $480 billion, according to Gast, who also notes that C&D loans are almost never securitized, so they're held on banks' balance sheets.
Such rapid loan growth usually creates trouble later. Indeed, delinquencies represented 7.1% of total C&D loans at the end of the first quarter, up from 0.9% at the end of 2005, Gast said.
"It's a huge increase. Most of the deterioration seems to be coming from residential construction projects, but certainly there's deterioration in commercial projects too," the analyst said. "The rate of deterioration is still accelerating."
Colonial BancGroup had 37% of its loans in C&D loans at the end of last year, while Sterling Financial had 33% and UCBH had 20%. East West Bancorp, a rival to UCBH, is also exposed, with 25% of total loans in C&D assets at the end of 2007, RiskMetrics data show.
Regulators
Where were regulators when these banks built up such large exposures?
That's a question RBC's Cassidy has been asking himself, noting that "they dropped the ball in a big way." Officials at the FDIC declined to comment.
Efforts by the Securities and Exchange Commission to make sure banks report accurate earnings may have made the situation worse, Cassidy says.
Bank regulators try to encourage institutions to build reserves in good times, so they're ready for downturns. But the SEC has been worried that banks might use reserves to smooth reported earnings, so it advised some lenders that they couldn't set aside reserves if they weren't experiencing commensurate credit losses, Cassidy explained.
That left reserves relatively low at the end of 2007, as the credit crunch was building momentum, Gast said.
Still, regulators have responded strongly so far this year. In addition to the FDIC's efforts to bolster its staff, the Office of the Comptroller of the Currency has been telling banks to boost reserves even if accountants worry that such steps will stray from SEC guidance, Gast explained.
Crisis redux?
The FDIC had highlighted 76 banks that it considered troubled at the end of 2007. That's up from 50 at the end of 2006, which was the lowest level for at least 25 years.
Once identified by regulators, troubled banks are often required to limit or halt loan growth and shrink their balance sheets by selling some assets, Cassidy said.
Resolution and receivership specialists at the FDIC, like Gary Holloway, value troubled banks' assets as quickly as possible and try to find a stronger bank to absorb the weaker entity through an acquisition.
The current crisis hasn't reached the scale of the savings and loan crisis. In 1990, more than 1,500 banks were on the FDIC's troubled watch list, out of a total of roughly 15,000. More than 1,000 banks failed in 1988 and 1989, FDIC data show.
But it's possible for such comparisons to understate the scope of the coming wave of insolvencies.
During the late 1980s, banks in Texas couldn't open a new branch in another county without forming a new commercial bank. That meant there were lots more lenders in the state when the S&L crisis struck.
So when a bank failed, "40 of its other banks failed on the same day," Cassidy recalls.
Today, no states have such requirements, so there will be fewer bank failures this time, but those that do fail may be larger.
That means each bank failure may have a larger effect on the U.S. economy, withdrawing a bigger chunk of capital from the financial system each time.
"Bank failures don't cause recessions, they lengthen them," Mason, the Drexel professor, explained. "We could get a mild recession that could linger for a while longer because of the inability to recharge capital in the banking and financial system."
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