Small businesses should be prepared for a wave of community bank defaults
More small companies have been doing an increasing amount of business with community banks over the past few years. And President Obama’s recently announced small business initiative included more money for such banks, so as to encourage lending to little guys.
But there is a dark side to this community bank-small business thing. And that’s the possible coming tsunami involving these banks, which made a great many soon-to-implode commercial real estate loans.
According to CFOZone.com, Sheila Bair, chairman of the Federal Deposit Insurance Corp. , recently noted that commercial real estate is a whopping 43% of community bank portfolios. Also:
For the 205 banks that have failed since 2007, a third of their loan portfolio has been made up of commercial real estate loans, compared to an industry average of 26.9 percent, according to investment bank KBW. The seven banks seized by the Federal Deposit Insurance Corporation last Friday had an even higher concentration with almost 40 percent of their loans tied up in commercial real estate.
The bottom line here: These pesky problems with commercial real estate loans could mean a coming disaster for community banks. As a result, despite the TARP-like infusion of funds from the government, these financial institutions may not be able to increase their lending to small businesses, because they’ll be trying to survive, same as the bigger banks did not long ago.
This is a likely–a very likely–scenario and one neither the Treasury department nor the Small Business Administration seem quite prepared to address. But we’re talking about at least the potential for a wave of defaults. And it’s one that may engulf small businesses–at just the wrong time.