Small banks face commercial lending crisis

The bank stress tests to be released Thursday could highlight a looming problem for small banks. Failure rates for commercial real estate loans are rising, and that could mean more than 500 small banks with less than $1 billion in assets may be in trouble. Analysts, who predict hundreds of bank closures in the next five years, were surprised by the 12 percent loss rate being used by regulators to scrutinize commercial real estate.

A loss rate that high means that U.S. banks and thrifts, which hold $1.8 trillion of commercial real estate on their books, could incur $216 billion in losses by the end of 2010. With that loss rate, "you're talking about a depression in the U.S. economy and a major crisis in the banking system," Richard Bove of Rochdale Securities told The Wall Street Journal.