Warren Buffett once quipped that when the tide goes out, you discover who has been swimming naked. At first glance, the banking sector now looks like a nudist beach. But if you look closer, you'll discover that a few regional banks didn't forget to put on their swimsuits.
Regional Banks, Securitizations, and Subprime Lending
Regional banking was always a competitive field, but its fortunes took a negative turn a few decades ago with the surge of securitizations. Gradually old-school regional bankers found themselves competing with investors in the multi-trillion-dollar fixed-income market and their enablers on Wall Street. The regional banker who used to personally know his borrowers and manually underwrite loans had no chance against the Street's well-oiled sales machine that was both flush with cash and ready to gobble up anything that it could package as a security and resell to yield-hungry investors.
In order to maintain their relevance and profitability, regional banks had to either cater to more marginal clients (read: subprime) or find a new gig, which led them to focus on less-homogenous products such as commercial real estate, construction, and loans to local businesses. For many years, this strategy worked well because the rise in real estate prices and relatively buoyant economy obscured the risks that were building up on their balance sheets. Although competition from super-regional banks and Wall Street was tough, regional banks could still grow by a very nice clip, report only minimal loan losses, and boast an eye-popping return on equity. Life was great--or at least it seemed to be.
Then the credit bubble burst and real estate prices collapsed. Regional banks suddenly faced a new reality: slowing growth and escalating loan losses that threatened their survival. This triggered a wave of bank failures. Since January 2008, the FDIC has closed over 30 regional banks, and we expect many more failures in 2009. The table below includes a few examples of banks that have a question mark hanging over their future. If current credit trends persist for a few more quarters, without raising more capital, failure is a possible outcome for these banks.
Source:- News.morningstar.com
Regional Banks, Securitizations, and Subprime Lending
Regional banking was always a competitive field, but its fortunes took a negative turn a few decades ago with the surge of securitizations. Gradually old-school regional bankers found themselves competing with investors in the multi-trillion-dollar fixed-income market and their enablers on Wall Street. The regional banker who used to personally know his borrowers and manually underwrite loans had no chance against the Street's well-oiled sales machine that was both flush with cash and ready to gobble up anything that it could package as a security and resell to yield-hungry investors.
In order to maintain their relevance and profitability, regional banks had to either cater to more marginal clients (read: subprime) or find a new gig, which led them to focus on less-homogenous products such as commercial real estate, construction, and loans to local businesses. For many years, this strategy worked well because the rise in real estate prices and relatively buoyant economy obscured the risks that were building up on their balance sheets. Although competition from super-regional banks and Wall Street was tough, regional banks could still grow by a very nice clip, report only minimal loan losses, and boast an eye-popping return on equity. Life was great--or at least it seemed to be.
Then the credit bubble burst and real estate prices collapsed. Regional banks suddenly faced a new reality: slowing growth and escalating loan losses that threatened their survival. This triggered a wave of bank failures. Since January 2008, the FDIC has closed over 30 regional banks, and we expect many more failures in 2009. The table below includes a few examples of banks that have a question mark hanging over their future. If current credit trends persist for a few more quarters, without raising more capital, failure is a possible outcome for these banks.
Source:- News.morningstar.com
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