Bloomberg explains why regional bank credit is drying up
Bloomberg has an excellent story that explains why credit is tightening up at the regional- and small-bank level. Essentially, banks are having a tougher time raising capital, so they're being forced to cut bank on lending activity. Here's an excerpt ...
"Mountain 1st Bank & Trust Co. Chief Executive Officer Greg Gibson forecast 12 percent loan growth for his North Carolina bank this year. Instead, he's spending more time handing out freshly baked cookies than extending credit.
"Gibson is "standing on the brakes'' because Mountain 1st, owned by 1st Financial Services Corp. of Hendersonville, North Carolina, can no longer sell trust-preferred stock to raise capital for loans so customers can buy airplanes or build veterinary clinics, Gibson said in a June 20 telephone interview. The bank, with $650 million in assets, is among more than 8,000 across the U.S. caught for the past six months in the shutdown of the $117 billion market for the securities, a hybrid of debt and equity.
"The fallout from the subprime-mortgage collapse is spreading from global lenders such as Citigroup Inc. and UBS AG to local ones, including Lansing, Michigan-based Capitol Bancorp, FirsTier Corp. of Northglenn, Colo. and Mountain 1st, which tempts customers at log cabin-style branches with cookies and coffee. Less capital for such hometown banks may stymie Federal Reserve Chairman Ben Bernanke's effort to prevent a credit crunch.
"There is no question there is a problem,'' said Chris Cole, senior regulatory counsel for the Independent Community Bankers of America, a Washington-based trade group for about 5,000 lenders. "Banks need the capital to lend. So that problem of raising capital causes a further slowdown. This inability to raise capital points to a damping of the whole economy.''
"So-called community banks and larger lenders have sold trust-preferred securities, known as TruPS, for about a dozen years. Collateralized debt obligations became the biggest buyers, generating enough demand to expand the market 10-fold, according to Merrill Lynch & Co. index data. The CDOs packaged the shares and sliced them into pieces with varying credit ratings.
"Community banks such as FirsTier were too small to attract insurance companies or mutual funds and sold the securities to CDOs instead, in issues of $10 million or $20 million at a time, according to Fitch Ratings analyst Nathan Flanders.
"The market was upended after mortgage foreclosures reached a record high of 2.47 percent for all loans in the U.S., starting a credit-market meltdown that sent investors fleeing to safer government securities.
"As the preferred market seized up, the Standard & Poor's Small Cap Regional Banks Index has fallen 34 percent this year, leaving banks unable to sell common stock without diluting existing shareholders. Cut off from fresh capital, some lenders may file for bankruptcy, according to ICBA's Cole."
"Mountain 1st Bank & Trust Co. Chief Executive Officer Greg Gibson forecast 12 percent loan growth for his North Carolina bank this year. Instead, he's spending more time handing out freshly baked cookies than extending credit.
"Gibson is "standing on the brakes'' because Mountain 1st, owned by 1st Financial Services Corp. of Hendersonville, North Carolina, can no longer sell trust-preferred stock to raise capital for loans so customers can buy airplanes or build veterinary clinics, Gibson said in a June 20 telephone interview. The bank, with $650 million in assets, is among more than 8,000 across the U.S. caught for the past six months in the shutdown of the $117 billion market for the securities, a hybrid of debt and equity.
"The fallout from the subprime-mortgage collapse is spreading from global lenders such as Citigroup Inc. and UBS AG to local ones, including Lansing, Michigan-based Capitol Bancorp, FirsTier Corp. of Northglenn, Colo. and Mountain 1st, which tempts customers at log cabin-style branches with cookies and coffee. Less capital for such hometown banks may stymie Federal Reserve Chairman Ben Bernanke's effort to prevent a credit crunch.
"There is no question there is a problem,'' said Chris Cole, senior regulatory counsel for the Independent Community Bankers of America, a Washington-based trade group for about 5,000 lenders. "Banks need the capital to lend. So that problem of raising capital causes a further slowdown. This inability to raise capital points to a damping of the whole economy.''
"So-called community banks and larger lenders have sold trust-preferred securities, known as TruPS, for about a dozen years. Collateralized debt obligations became the biggest buyers, generating enough demand to expand the market 10-fold, according to Merrill Lynch & Co. index data. The CDOs packaged the shares and sliced them into pieces with varying credit ratings.
"Community banks such as FirsTier were too small to attract insurance companies or mutual funds and sold the securities to CDOs instead, in issues of $10 million or $20 million at a time, according to Fitch Ratings analyst Nathan Flanders.
"The market was upended after mortgage foreclosures reached a record high of 2.47 percent for all loans in the U.S., starting a credit-market meltdown that sent investors fleeing to safer government securities.
"As the preferred market seized up, the Standard & Poor's Small Cap Regional Banks Index has fallen 34 percent this year, leaving banks unable to sell common stock without diluting existing shareholders. Cut off from fresh capital, some lenders may file for bankruptcy, according to ICBA's Cole."
posted by Mike Larson at
12:40 PM
0 Comments:
Post a Comment
<< Home