Small Banks & Commercial Loans Worry the Federal Reserve

[Moe Bedard]

"When you ask people at the Fed what the biggest worries are, this (commercial real estate) is at the top of their list," said Laurence Meyer, a Fed governor from 1996 to 2002.

Small banks didn't cause the mess, but no bailout for them

How dire is it? Unable to find enough sound banks to acquire failing banks, the FDIC relaxed its rules earlier this year to allow private-equity funds to bid for troubled lenders.

Banks hold about 50 percent of all outstanding commercial real estate loans, many of them smaller regional players. Another 20 percent of commercial real estate loans have been pooled together by investment banks and sold as commercial mortgage bonds, which also are experiencing high default rates.

The rising rate of delinquency and default in commercial real estate jeopardizes efforts by the Treasury Department and the Federal Reserve to get much-needed lending flowing again.

"The danger here is not the direct macroeconomic impact but the potential impact on the safety and soundness of the banking system."

Read more from: Small banks didn't cause the mess, but no bailout for them - Politics AP - MiamiHerald.com