This past Friday night, San Joaquin Bank of Bakersfield, California became the 99th bank the FDIC closed this year (refer here) The growing wave of bank failures has been a troubling story all year, and one that unquestionably will get worse before it gets better. But now that the 100th bank failure of the year is approaching, the mainstream media have noticed and have taken up the story.
The approaching bank failure century mark certainly is noteworthy, but not all of the reporting is appropriately balanced. Some of the media reports have gotten a little overexcited about the whole thing.
Among the recent news reports observing the approaching 100th bank failure of the year are the October 11, 2009 New York Times article entitled "Failures of Small Banks Grow, Straining FDIC" (here) and Time Magazine’s article, in its October 26th issue, entitle "Spotlight: Bank Failures" (here). The Cleveland Plain Dealer’s lead article on Sunday October 18, 2009 was devoted to the topic, as well as to the threat that local banks face from souring commercial real estate loans.
The growing number of failed banks is unquestionably an important story and one that rightly deserves the media attention it is getting. But apparently not content with the presently available facts, some media sources have felt compelled to try and sensationalize the story.
Both the Time Magazine and New York Times article linked above repeat the alarmist (and as I detailed here, arguably suspect) forecast that as many as 1,000 banks – approximately one eighth of all the banks in the country – will fail by the end of next year. The Time Magazine article goes even further by reciting without question or comment an unsubstantiated projection that "soured commercial real estate loans may generate a fresh $600 billion of losses by 2013."
Not only is this projection out of proportion to other published commercial real estate loan loss projections – the highest number generally circulating is $100 billion – but it is self-evidently questionable. The total amount of commercial real estate and construction loans held by banks is $1.8 trillion (a figure recited, among other places, in the Times article linked above). How likely is it that one third of all of these loans will become total losses by the end of 2013? To put this question into context, the current commercial loan default rate that has everyone so alarmed is 3.8%.
In the current economy, we have more than enough real challenges to deal with without the media conjuring up projections to try to make things seem even scarier than they already are.