Northern Country

How globalization changes capitalism, the economy and politics

Posts Tagged ‘banks

Is CRE the next accident to happen?

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Commercial real estate is shaping up to become another causality of the financial crisis and CRE mortgage delinquencies and loan defaults are now starting to pile up on the balance sheets of US financial institutions. That is of course on top of losses from residential real estate, consumer credit and the securitization markets that sort of connect all the sore spots on Wall Street.

$817 billion of total CRE-loans are still outstanding in June, 2009, and about 29 billion have run into trouble. In the month of June loan delinquencies soared by $10 billion heating up the debate about future CRE losses by financial institutions.

But that’s not all. About $105 billion worth of troubled loans have been worked out. A majority of those loans experienced an averaged loss of almost 64 percent. Delinquency rates on CRE are up to 4.5 percent in the second quarter from 3.6 percent in the first quarter, 2009.

Similar to residential real estate CRE property prices have also collapsed. Moodys/REAL Commercial Property Price Index (CPPI) has not bottomed as of April 2009:

CREallPropertynationalindex

In CRE much like with residential real estate many loans have been securitized and actual losses to financial institutions and investors will therefore depend largely on two conditions. First, the total amount of loan defaults will be substantial given the collapse in prices. Second, FASB statements 166 and 167 will determine how big the losses are or if they can be deferred onto some future time horizon.

FASB statements 166 and 167 refer to securitized loans in special purpose entities, and require banks to consolidate insufficiently capitalized SPEs onto their balance sheets. Although this should foster more disclosure for investors its impaired with whims of possible rule-bending.

FASB determination to implement these rules is another uncertainty factor. In April, 2009 FASB halted fair value accounting to stop the hemorrhaging of impaired financial assets. Statements 166 and 167 are supposed to take effect in the first fiscal quarter beginning after November 15, 2009.

Some are already preparing for the worst. Bank of America now expects to bring about $150 billion back onto its balance sheet under the new FASB rules. This 150 billion off-balance-sheet assets comprise of $12 billion home equity conduits, $85 billion card securitizations, and other variable interest entities make up the remaining $53 billion. Maybe BofA is just lucky.

A muddle through version of a stress test

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America is leading the way, and Europe follows. But is it really? A few days ago the Federal Reserve published results of its Supervisory capital Assessment Program (SCAP). Although received with plenty of criticism it revealed a rather robust capital position of America’s largest financial institutions. Only a few of them are in need of fresh capital, if the economy were to worsen significantly. According to the results it is likely that concerned banks do not need any more tax payer funds to meet their requirements.

EU-Finance Commissioner Joaquín Almunia wants a stress test for European banks and financial institutions. Unfortunately this European version will be less transparent and less scrutinizing. A capital adequacy test will be applied only to the financial system as a whole and does not concern individual financial institutions. The question will be answered if financial institutions in general will be able to withstand a worsening of the financial crisis. The council for Economic and Financial Affairs (ECOFIN) contrary to Mr. Almunia wants the results of the stress test not being published. The question bears to mind which member states and their finance ministers do not want the health of their financial institutions being revealed. One cannot help but speculate that European financial institutions are in direr straits than their US counterparts. If there is only one result coming out of this half secretive test it will be this.

Written by Alfred

12. May 2009 at 5:01 pm