Nonperforming Loans Could Cause Further Problems for Banks
One of the issues that has some still worried about further economic developments are threats to banks. Many banks are seeing nonperforming loans. These are loans that are delinquent. Part of the problem is that many banks (more than 150 publicly traded) have 5% or more of their holdings in loans that are not performing as they should. This level of exposure could be a signal that more problems are on the way. Bloomberg reports on the problems associated with nonperforming loans:
“At a 3 percent level, I’d be concerned that there’s some underlying issue, and if they’re at 5 percent, chances are regulators have them classified as being in unsafe and unsound condition,” said Walter Mix, former commissioner of the California Department of Financial Institutions, and now a managing director of consulting firm LECG in Los Angeles. He wasn’t commenting on any specific banks.
Missed payments by consumers, builders and small businesses pushed 72 lenders into failure this year, the most since 1992. More collapses may lie ahead as the recession causes increased defaults and swells the confidential U.S. list of “problem banks,” which stood at 305 in the first quarter.
Clearly, there are problems underlying the banking industry still. And, with unemployment still high and income dropping, it is harder for many to make their payments. In these cases, borrowers are going delinquent on their loan.
Of course, 5% of holdings in nonperforming loans is not an automatic death sentence for a bank. Many banks now have capital cushions that can help absorb the problem. Additionally, some banks are in the process of selling their bad loans to get them off the books. In the end, whether a bank can survive this period will depend on whether it can manage its cash flow, and just how much capital will be needed to make up for bad loans. Banks that have sufficient capital, and that have lower exposure, are more likely to make it through.
[...] to begin with, losing a job can make it very difficult to make mortgage payments going forward. As non-performing loans rise in number, it is clear that banks may be seeing further [...]