Regulators Put California Banks on Warning List : Banking: The FDIC says the state’s financial institutions are suffering from an increase in troubled real estate loans.
California banks, long immune from the severe real estate slump that has plagued the Southwest and New England, reported a worrisome increase in troubled real estate loans in the first quarter of this year, the Federal Deposit Insurance Corp. said Tuesday.
FDIC Chairman L. William Seidman said the agency had moved California into its “warning area” as the total of problem loans--mostly souring commercial real estate loans--in bank portfolios exceeded 4% for the first time.
However, he says there is “no indication California will have the depth of problems that Texas and New England had.” More than 22% of construction loans in the Northeast are behind in payments, according to the FDIC’s latest study of banking activity.
But California bank’s are starting to show some signs of stress. Bank holdings of troubled real estate, just 2.96% of assets at the end of last year, jumped to 4.24% during the first quarter this year.
Regulatory officials consider a level of troubled real estate loans of 3% or less as acceptable. But they worry about a bank’s condition when the rate of delinquent loans and real estate owned through foreclosures goes above 4% of the banks’ total real estate loan activity.
California’s banking industry is still in better shape than the overall national system, in which 7.38% of real estate loans are listed as in financial trouble.
Real estate is in a severe slump in New England, where troubled loans account for 17% of the real estate assets of Massachusetts banks and 16% in Connecticut. Texas, recovering after seven years of depressed real estate prices, has a troubled loan rate of 11%. Builders and developers, struggling in such markets with a high vacancy rate, are finding it difficult to find tenants for new projects.
Several large California banks have been hurt by real estate loans in Texas, Arizona and elsewhere. And there is growing concern that a glut of office buildings in the state’s major urban and suburban centers eventually will cause developers to default on loans and take a toll of the state’s banks.
Seidman warned last summer that several areas of California, including Los Angeles and Orange County, appeared to be dangerously overbuilt. Some submarkets in Southern California have office vacancy rates of more than 20%.
These problems are beginning to show up on banks’ bottom lines. In California, the banks’ net income plunged to $753 million during the first quarter, down from $1.1 billion a year ago, according to the FDIC.
Nationwide, real estate problems are dragging down the performance of the nation’s banks, which had net income of $5.7 billion during the first quarter, down from the $6.2 billion earned in the first quarter a year ago, according to the FDIC report.
The banking business changed dramatically in the 1980s as many traditional customers, such as big corporate borrowers, went to Wall Street to raise money through the sale of commercial paper. And many retail customers were lost to other lenders, such as automobile finance companies that offered to handle car loans. Banks increasingly turned to real estate lending, now their biggest single source of business.
Banks held real estate loans totaling $836.1 billion in the first quarter, up 7.5% from $777.6 billion a year ago. The second-biggest category of business, commercial and industrial loans, fell to $606.4 billion from $623.1 billion a year ago.
In addition to losses on real estate, the nation’s banks have $7.3 billion in overdue loans related to corporate buyouts and takeovers, about 10% of such loans. About 20% of the loans to foreign governments, $5.1 billion out of $24.8 billion, are troubled, the FDIC said.
The persistence of the recession, which will be a year old next month, has increased the cost of disposing of failed banks and savings and loan associations. More financial institutions will become insolvent and be seized by the government, Seidman said.
On another financial front, Comptroller General Charles Bowsher reiterated on Tuesday his concerns that the nation’s banks may need a large taxpayer bailout similar to that for the savings and loan industry. He also said the cost of the savings and loan bailout will be much higher than previous Administration estimates.
Bowsher, the head of the General Accounting Office, said it could cost at least $150 billion to safeguard the deposits of failed thrifts and dispose of their assets, compared to the Administration’s top estimate of $130 billion.
“You are looking at (about) $150 billion through 1992,” Bowsher told the Senate Banking, Housing and Urban Affairs Committee.
The Resolution Trust Corp., which is handling the insolvent S&Ls;, has received $80 billion and will need $50 billion to $70 billion for next year, Bowsher said.
“The message I have to deliver this morning related to RTC future funding needs is not a good one,” he said. “Due to the current economic recession, we are seeing a slow but steady increase in the number of institutions with negative earnings and negative or low capital.”
Bowsher criticized the RTC for inadequate management of the thrift assets it holds.
“As a result, it loses opportunities to package and sell available loans and other financial assets,” he said in a letter.
The ultimate cost of the S&L; rescue could be $300 billion or more over 40 years, including interest payments on the long-term bonds sold by the RTC to raise funds for the cleanup.
