Interest Rate Roundup

Tuesday, April 04, 2006

Banking risks rising: FDIC

The FDIC just released its latest regional and state-by-state bank performance report. Some key statements from the release announcing the report can be found below (with areas of particular interest bolded by me)

"Moderate to strong job growth across much of the nation is helping to support loan growth and credit quality at federally insured banks and thrifts," said FDIC Chief Economist Richard A. Brown. "However, heavy dependence on mortgage and construction lending is making some banks more vulnerable to regional downturns in real estate activity."

In today's report, FDIC analysts noted that while average U.S. home prices increased at a double-digit rate for the second consecutive year, rising inventories and slowing sales point to possible moderation in housing activity for the remainder of 2006. Analysts also noted rapid growth in commercial real estate (CRE) and construction and development (C&D) lending and higher concentrations of these loan types as a percent of capital.

The bottom line is this: The nation's banks are loaded to the gills with real estate loans -- both residential and commercial. Right now, bank stock investors don't seem to care. They're paying attention to every little word out of the Fed, waiting for someone to say, in effect, "We're done tightening. You can go ahead and buy everything in sight." But with the housing market already going over a cliff, and commercial real estate valuations stretched to the max, the risk of real credit problems down the road is building.


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