KPCC business analyst Mark Lacter talks about the latest local banks to fail; he also talks about why banks aren't lending.
Steve Julian: On Tuesdays we talk about the latest business stories with Mark Lacter. Mark, we've seen a couple more local banks fail; when will the bleeding stop?
Mark Lacter: For the most part it already has Steve. The local banks that were taken over late Friday - Western Commercial Bank and First Vietnamese American Bank – they were very small and had the misfortune of having opened about five years ago, right before the roof caved in on the economy (which means that they made a lot of bum loans). So far this year there have been 143 bank failures, which is roughly 60 more than for all of 2009 (not a great year in itself).
Julian: Bad timing?
Lacter: Yeah, many of them banks had the worst of all worlds: They got in late, they tended to make some of the riskiest commercial real estate loans, and they didn't have enough money to cover losses from failed loans. The regulators ordered them to come up with more funding to accommodate those loan losses, but they couldn't find any investors who were willing to cover the shortfall. Now, 143 bank failures in less than a year is certainly not great news (you'd have to go back to the savings and loan crisis to find as many closures), but for the most part the damage has been contained so far. Matter of fact, the banking business in Southern California has shown signs of turning around. There are 18 banks headquartered in L.A. County and they just reported combined quarterly profits of $119 million, compared with a loss of $122 million a year earlier (numbers are according to the Business Journal).
Julian: What do you glean from that?
Lacter: A couple of things: The banks that had been in the worst financial shape are now gone, and the survivors have most of their bad loans under control. Not that they're completely out of the woods - many of them have not returned the money they received under the TARP program, which means they're still stuck paying a quarterly dividend to the government. And the biggest problem, for the banks and for everyone else, is that many of them have been very slow to start lending again, and if a bank doesn't lend, it can't make much money.
Julian: All right, so why aren't banks lending?
Lacter: Well, they're doing the exact opposite of what they were doing in the years leading up to the crash. That's when they lent money to just about anyone who walked in the door because if they didn't, the customer would walk across the street to a bank that would. And if enough customers did that, the CEO of the bank would be out of a job. This time out, they can afford to sit back because customers aren't able to walk across the street anymore and get a better deal. Lending requirements are onerous all over the place for most any borrower, and that could easily continue through the end of next year.
Julian: Do you see this in any particular area?
Lacter: The market for jumbo loans is a good example - these are mortgages that generally exceed $417,000, and they were a very big deal during the real estate boom, easily accounting for 40 percent of all home sales in Southern California. Now, they're still hovering around 18 percent - and there's no way the housing market can fully recover until that percentage starts going up.
Julian: Any signs that it will?
Lacter: Actually, there has been some warming up on lending (standards seem to be easing a little bit and small business owners have been a little more optimistic in the last few weeks). Plus, the Federal Reserve’s decision to put more money into the system could make a difference going into next year. More lending by the banks means more revenue, which also means higher profits. Of course, it also depends on the willingness of businesses and individuals to apply for loans, and that won't happen in big enough numbers until people start feeling more confident about the economy. We’re still waiting for that to happen.
Lacter: Mark Lacter is a contributing writer for Los Angeles Magazine and writes business blogs at LA Observed.com and at kpcc.org.