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Olivier Garret
Prior to joining Casey Research in January 2007, Olivier Garret was a principal in Kemp Management, ... More
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Regional Banks Brace for Pain
05/20/2009Federal regulators haven't done enough to help smaller regional and community banks that are only just beginning to feel the pain of sweeping defaults on commercial real estate loans after lending heavily to the sector during the boom times earlier this decade, Olivier Garret, chief executive of Casey Research, told Markets Media Thursday.
“Generally speaking [regulation] has been targeted on the ones that are ‘too big to fail,' rather than on the ones that should survive because they were well run, managed risk well and did not lend under outrageous terms,” said Garret. “The Public-Private Investment Plan and Term Asset-Backed Securities Loan Facility programs and change in GAAP reporting rules are designed to avoid to confront the real problems of the financial industry and recognize the real loss in value of the banks' assets."
Garret said that could be a major mistake for the American banking system, as community and regional banks become further squeezed by a still-tanking economy.
“The problems in the sector are only starting. Although occupancy is down [for] retail, office, manufacturing across the board, this is not affecting existing loans until they have to renewed or the borrower is in breach of covenants,” said Garret.
Garret said that as leases expire and cash-strapped businesses decide either not to renew or fall into bankruptcy proceedings, landlords will “struggle” to find new tenants and will continue to see their revenues and profits decline.
“At the same time, since the loans were contracted with the lenders, the market value of the properties has declined and the lenders loan-to-value ratios have declined,” he said. “Two years ago banks often lent 80 percent of the then appraised value, [but] today they can't usually lend more than 55 percent of a lower amount.”
He added that with so many regional banks deeply invested in commercial real estate, “there are a lot of [examples] across the country and many areas were values and occupancy are much worse” than many analysts realize.
“A lot of loans are coming due in the next two years,” said Garret, who said that recent moves by federal regulators to stress test and shore of the nation's biggest banks saw “very little done for the smaller banks.”
By Riley McDermid, Deputy Editor
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