This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Banks' $300 Billion 'Pretend' Problem

Story updated to include additonal information.

NEW YORK ( TheStreet) -- Some of the largest U.S. banks may face similar questions that are now being posed to Regions Financial (RF - Get Report) as regulators crack down on so-called extend and pretend loan practices.

But the practice is only a symptom of a much larger problem that eventually will force banks to digest billions in losses on commercial real estate loans that could eventually drown some bank balance sheets.

"At the moment it's a game of musical chairs," said Dan Gorczycki, managing director of commercial real estate broker Savills. "It just depends who will be left without a place to sit."

The board of Regions is investigating whether bank management delayed the disclosure of loans that were losing value, according to an article in the The Wall Street Journal . The Journal cited court documents and people familiar with the matter, adding that the banks audit committee began the investigation after the Federal Reserve expressed concern.

At issue is the practice of extending a maturing loan while pretending its underlying book value hasn't declined. The practice artificially deflates nonperforming loans and credit costs in the current reporting period since the loan doesn't mature and losses aren't realized.

But the practice also allows problem loans to build up over time until they can ultimately collapse a bank's balance sheet.

Extend and pretend is "neither trivial nor rampant" in the banking industry, but banks with high concentrations in commercial real estate are most likely to fall into its trap, according to a report issued last month by ratings agency Fitch.

" [Banks] with decentralized credit functions, and concentrations in [commercial real estate] (CRE) loans, especially in areas with relatively weak CRE values, may be more prone to extending such high-risk loans without addressing inherent credit weaknesses," the report stated.

In fact, commercial real estate may turn out to be the next Achilles heel of the banking industry following the subprime residential mortgage crisis since so many loans have lost value but the losses have yet to be booked, Fitch said.

"Various industry reports suggest that roughly half of the $1 trillion of CRE loans maturing over the next three years are underwater, with as much as $200 billion to $300 billion being more than 20% underwater at maturity," Fitch said.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
RF $9.22 -3.90%
AAPL $110.71 -1.80%
FB $88.74 -0.77%
GOOG $605.97 -2.00%
YHOO $31.75 -1.50%

Markets

Chart of I:DJI
DOW 16,196.48 -331.55 -2.01%
S&P 500 1,933.72 -38.46 -1.95%
NASDAQ 4,705.4670 -71.0410 -1.49%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs