Banks At Risk With Sub-Prime

June 19, 2002

New FDIC Report Points To B And C Paper Problems

Inman News Features

Subprime lending is exposing the nation?s banks to lingering economic risk, according to the FDIC?s Regional Outlook. The study says that a "consumer-led" economic recovery is underway but that bank performance could be hurt by losses from sub-prime lending.

The report points to a turning economy but also recognizes the demons to a full recovery.

"Corporate profits remain weak, business fixed investment continues to decline, over-capacity exists in key industry sectors, commercial real estate vacancy rates are rising, and consumers and businesses are carrying high debt loads," reads the report. Moreover, "going forward, the greatest near-term risk to FDIC-insured institutions appears to be sub-prime and high loan-to-value consumer lending."

According to the FDIC report, not only are loan losses much higher than those experienced with prime consumer loans, but credit models used by sub-prime lenders have tended to under-predict actual losses. A longer-term vulnerability relates to the effects of the recent economic slowdown in formerly rapidly growing metropolitan areas.

Copyright: Inman News Service

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