Are commercial loans the next shoe to drop?

Why do banks exist? This keeps coming to mind as the horizon marking the beginning of the end of the financial crisis gets pushed further and further away. We need a safe place to park our cash, and the price we pay for that is razor thin deposit interest rates and multi-million dollar bonus payments to bankers who take those deposits and lend them to people who can't pay back the money. The risks pay off for bankers -- but for the rest of society, not so much.

The current financial crisis was based on the discovery the bankers were wrong about consumer loan repayment -- specifically, they made a slight mistake in assuming that consumers with no incomes would be able to repay mortgages. Now a new form of this toxic waste is rearing its ugly head -- business borrowers who stiff the banks.

I'm talking about commercial loans -- which amount to $1.8 trillion on the books of U.S. banks. Think mortgages on office and apartment buildings and shopping malls, and construction, development and industrial loans. Businesses that are losing money tend to fire people, which means they need fewer square feet. Consumers who are out of a job tend to spend less at the mall, which drives retail stores to close up shop. And when millions are in foreclosure, the construction business is likely to slow down.

So it should come as little surprise that these commercial borrowers are having more and more trouble paying back their loans. Specifically, nonperforming assets (NPAs) -- loans that borrowers have stopped repaying -- are up to 4.48 percent of total loans, from 2.09 percent in 2008. And banks are not setting aside reserves at the 100 percent of those NPAs that analysts like to see. Instead, at one bank -- Suntrust (STI) -- that ratio has tumbled from 70 percent in 2008 to 53 percent in 2009.

The problem is particularly pronounced among commercial real estate loans that amount to $550 billion. And Suntrust is not alone here: Comerica (CMA)'s NPA/Reserves ratio has fallen to 78 percent from 91 percent in 2008, and Zions (ZION) Reserves/NPA fell to 65 percent in 2009 from 79 percent last year. One bright spot? BB&T (BBT) has a Reserves/NPA ratio of 101 percent.

Commercial real estate loans worth $60 billion have become distressed in 2009. The "good" news is that it looks like this number is and will probably remain below the trillions in bad loans required to trigger another big financial rescue plan.

But we have seen this movie many times before -- in the early 1980s, the late 1980s, and the early 2000s. With office vacancy rates rising to 14 percent in Manhattan and 11 percent in Washington in the first quarter -- things are not likely to get better soon.

Do we really need to give bankers the power to wreck our economy about once a decade just so we have a "safe" place to deposit our money? Here's an alternative approach -- deposit-only banks.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.

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