Fed’s Rosengren: Smaller Banks at Risk from Housing Fallout

The ever-widening net of the U.S. housing crunch was cast a little bit wider Thursday evening by Boston Fed president Eric Rosengren, who said that continued weakness in housing likely would strain many of the nation’s smaller banks. Community banks have so far weathered the credit storm better than their larger counterparts, thanks in part to an aversion to both subprime and securitized mortgage lending. But that strength may yet turn into an unexpected weakness, Rosengren said in remarks yesterday at the an economic conference in New England. “Should the unemployment rate rise and housing prices continue to fall,” he said, “financial stresses caused by the housing correction could well spread beyond the large banks involved in complex securitizations, and the smaller banks with sizeable portfolios of construction loans, to a larger set of financial institutions.” Some smaller banks with sizeable exposure to residential construction lending, considered a component of commercial real estate lending, have already begun to experience troubles; the Boston Fed president’s remarks suggest that even those without such exposure may soon feel the pangs of housing’s crunch. Such an outcome may be more devastating for small banks than their larger counterparts, he suggessted. “Problems could expand beyond securitized assets to have an impact on the nonsecuritized assets held by smaller banking institutions,” Rosengren said. “It is possible that these institutions may not be able to tap additional capital quite as easily as larger institutions, and if so they may be forced to constrain other lending to address any losses.” While Rosengren didn’t suggest that smaller banks were facing an increased risk of failure due to housing’s continued fallout, he did say that “the duration of today’s situation may be longer than some are anticipating.” A widely-read story late last week by MarketWatch’s Alistair Barr noted that many on Wall Street — and those at the Federal Deposit Insurance Corp. — now expect to see a rash of bank failures in late 2008 and into 2009, although some question still exists as to whether the size and scope of the expected coming banking mess will rival that seen in the 1980s savings & loan debacle. That same story caused quite an industry stir by suggesting that Pasadena, Calif.-based IndyMac Bancorp (IMB) was one such bank in “dire straits” and potentially facing bankruptcy, allegations that led to a detailed and clearly flustered response from press representatives at the former Alt-A powerhouse. “Safety and soundness remains our highest priority at Indymac Bank during these challenging times, and we remain in a solid overall financial position,” IndyMac communications director Grove Nichols said on the company’s corporate blog. Earlier in the week, FDIC chairman Sheila Bair sounded the alarm on an increasingly shaky outlook for many banks nationwide. Disclosure: The author held no positions IMB when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.