Commercial Real Estate Losses Push Closures to 120

Bad commercial real estate loans that were made during the credit explosion are one cause of trouble in the banking system. So far this month, five banks in Georgia, Michigan, Minnesota, Missouri, and California have been closed by U.S. regulators. The closures have made 2009 the worst year yet for bank closures--with 120 shuttered since last January--compared to 25 in 2008 and 3 in 2007. The failed banks are victims of the recession and rising loan losses. Experts say that there could be more closures by the end of the year, but regulators are seizing banks slowly to avoid panic and because it is hard to get buyers for failed banks.

The most recent failed banks are Georgia-based United Security Bank of Sparta, Michigan-based Home Federal Savings Bank of Detroit, Minnesota-based Prosperan Bank of Oakdale, Missouri-based Gateway Bank of St. Louis, and California-based United Commercial Bank of San Francisco. As receiver for these banks, the Federal Deposit Insurance Corporation’s (FDIC) fund for protecting customer accounts-- the Federal Deposit Insurance Fund--will be severely affected by the closures.

The FDIC insures deposits at 8,195 institutions with roughly $13.5 trillion in assets. Customers are reimbursed for deposits of up to $250,000 per account when a bank fails. But, the fund has been significantly stretched by the increasing number of failing financial institutions. The failure of United Commercial Bank alone is expected to cost the fund approximately $1.4 billion; the other failures are expected to cost the fund a combined $132.7 million. Though there are some signs of economic recovery, experts project loan losses on commercial real estate to remain high for banks that hold large amounts of high-risk loans.