Dugan on 1990 and bank failures

In an exclusive interview with the Financial Times yesterday, OCC head John Dugan said that the agency sees a wave of bank failures in the not-too-distant future, particularly as the credit and mortgage crunch begins to work its way to regional and community banks most vulnerable to failure. From the story:

“We’re going to have some more bank failures that will come back more to historical norms and may go above that with time,” he said. “That is a natural consequence of the economy going from historically exceptionally benign credit conditions to something that is more normal to something you would get in a downturn.”

Dugan’s a bright guy, but let’s be honest here: this is an economy that careened from wild exuberance into outright recession in less than 6 months — all thanks to mortgage banking and its ancillaries. Later on in the interview, the numbers come out, and we’d submit that the OCC fears much more than a typical rash of bank failures, or at least should:

Dugan … is particularly worried about lending by smaller banks to commercial real estate developers for condominiums and other projects. More than a third of smaller community banks have made commercial property loans that exceed 300 per cent of their capital, the OCC says. By comparison, in 1987, when hundreds of banks failed amid a commercial property collapse, such banks had commercial property loans equal to 175 per cent of their capital. Mr Dugan said he did not expect failures to rise as high as during the late 1980s and early 1990s – when 534 banks failed in 1989 alone – because banks are better capitalised, have better underwriting standards and did less speculative lending.

Color us unsold on the speculative lending part, for one thing. And a third of smaller community banks have CRE loans at 300 percent of capital? Need we remind market participants of the pitfalls of leverage?

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