The Wall Street Journal has run its own version of the the Fed’s stress test on 900 small and midsize institutions, and it claims they’ll see losses of about $200 billion by the end of next year.
In such a scenario, at least 600 of the banks would see their capital levels shrink to a level that would be deemed unsafe by regulators.
The biggest culprate? You guessed it, commercial real estate, which could contribute about $100 billion in losses. Continued home loan losses is next, at about $49 billion.
WSJ: “They are in just much worse shape” than the big banks, says Terry McEvoy, an Oppenheimer & Co. analyst who reviewed the Journal’s analysis. “There is a lot less earnings power at these banks.”
The Fed this month estimated that the 19 stress-tested banks could face losses of $599 billion if the agency’s gloomiest economic scenario comes true. For the 10 large companies found to need additional capital, most of the shortfalls are manageable.
Few smaller banks are likely to attract the bargain-hunting investors now expressing interest in recapitalizing the industry’s giants. Many smaller banks are trying to bolster their capital by selling assets and making fewer loans.
What’s somewhat amusing here is that throughout this crisis, there’s been a lot of trumpeting of small banks, as somehow being either a) less stupid or b) less greedy than their Wall Street counterparts, as an explanation for why there hasn’t been as much of a crisis on the smaller levels.
Well, a better answer may simply be that their portfolios are different, and haven’t been hit in the same way yet. And to the extent that small bankers are greedy and stupid, too? Well then this just means that those terms cease to have any useful meaning.