Monday, May 23, 2005

Feds Scrutinize RE Lending

The higher-ups in the US federal bank system have sent another chilling notice to members, this time in the form of a FDIC letter. "An influential federal agency has raised a red flag over Washington banks for their heavy investment in commercial real estate, fearing that many of them risk a credit crunch if market conditions take a turn for the worse."

"The agency said it would 'typically' apply such additional reviews to banks that have a ratio of commercial real estate loans-to-Tier 1 Capital of 300 percent or higher. Here in Washington, fully two-thirds of the nearly 100 state banks have commercial real estate ratios of over 300 percent, according to FDIC data. Topping the list is Heritage Bank of Olympia with 832.6 percent, followed by Frontier Bank (697.5 percent), Golf Savings Bank (683.2 percent) and North County Bank of Arlington (680.7 percent)."

"'The median level of CRE loan exposure in banks in the San Francisco Region is roughly double that of banks in the rest of the country, with many banks actively involved in commercial real estate lending at levels far in excess of the region's median,' said the letter from Nancy Hall, for the FDIC."


At 8:44 AM, Anonymous Loren said...

So why the worry over commercial exposure, but not residential?

Part of the reason I own treasuries and I bonds is that local banks are so leveraged to residential real estate. The Feds can always print me up a fresh batch or paper dollars to pay off their debt (that I can use to pay off my debt) , homeowners can't.

My other "savings" is paying off my mortagage and having all my cars paid for.

Given the history of regulators to stop troubles so far, the banks are in trouble.

At 10:12 AM, Anonymous Anonymous said...

I agree - I own a house, but just recently paid off the mortgage and have no other debt. I also have been doing a flight to quality and have been transferring funds out of the stock market and bank money markets for treasury backed money markets. If this thing blows up badly we could see some big bank failures, and the FDIC is nowhere near in the position to bail out a widespread banking failure

At 11:13 AM, Anonymous Anonymous said...

Some money market accounts are FDIC-backed, right?

I can imagine the Govt. letting GSEs die, but I can't imagine they would not follow through on FDIC.

Can the Govt compel the printing of money to back the FDIC? As I understand it, new money is created only when the Federal Reserve buys government bonds. But what if the Federal Reserve refused?

At 11:44 AM, Anonymous Anonymous said...

FDIC is just insurance. It is federally chartered, but the government is under no obligation to cover losses should banks fail. FDIC currently has $1.25 in reserves for each $100 insured. Just one big FDIC insured institution (a big national bank) could bring the FDIC down. The FDIC was created during the depression to prevent future bank runs. It was not designed to be able to cover a mass bailout.

At 11:49 AM, Anonymous Anonymous said...

response by 10:12 anon. The money markets I have been shifting from are in fact FDIC insured, but treasuries are safer because they are backed by the "full faith and credit of the United States" FDIC is simply insurance and could not possibly bail out a massive banking failure with its current level of reserves

At 12:04 PM, Anonymous Anonymous said...

11:49 -- can you buy these Treasuries at a bank, or do you have to do it online or otherwise? Thanks.

At 12:41 PM, Anonymous Anonymous said...

Are you preferring short-term Treasuries?

Is the potential loss from interest-risk worth the extra security? Of course, the interest risk could work in your favor in a deflation.

At 12:44 PM, Anonymous Anonymous said...

You can purchase them through Treasury Direct, or you can purchase through a fund that is limited to treasuries. I use the vanguard admiral treasury money market. It is available for those with $50,000 to invest, and they also have a regular treasury money market available for those with $3,000 to invest. The admiral shares have lower expenses and thus a higher yeild.

At 12:47 PM, Anonymous Anonymous said...

Here is a link to the vanguard page. the Treasury money market pays 2.55% and the admiral Treasury money market pays 2.71% - rates have been increasing almost daily for the past few months.

At 5:54 PM, Anonymous Anonymous said...

What is the risk of Vanguard going under?

At 12:57 AM, Anonymous Anonymous said...

yes the banks can fail the but govt will print more money, thats a no brainer, thus bailing them out.

At 7:35 AM, Anonymous Anonymous said...

Vanguard is a "mutual" mutual fund company. Meaning it is owned by the fund holders. The individual mutual funds would lose money, but the company itself would remain in tact. Investing in a treasury money market is the same as buying direct, except they are pooling different maturities together, so it is more liquid. - I did look at the prospectus for the Treasury money market at Vanguard. It says they can invest up to 20% in government agency (non treasury) debt. Meaning that up to 20% could be invested in the MBS market if they wanted to. So your funds could be 20% at risk. That is probably a pretty safe bet - and I would still say its safer than an FDIC insured bank money market.

At 1:04 PM, Anonymous Anonymous said... says they are backed by the full faith and credit of the U.S.

However, I don't believe the government can just 'print more money.' What happens if the Federal Reserve refuses to go along with it?


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