Foreclosures are not the only Cause for Butchering Main Street Banks

foreclosure house

Foreclosures are not the only and sole cause for the butchering of Main Street banks. The other reasons are wrong investments and funds originating from risky sources for the latest crop of bank failures.

Generally on Friday afternoons, regulators of banks come out with statements of the latest number of bank failures. So far 52 banks have downed shutters and the speed is expected to gear up. Behind the actions has been at work a toxic cocktail of risky funding methods and grant of loans to business enterprises that turned sour.

The majority of the banks that collapsed till now this year were given the death blow the huge number of loans that had been give to residential and commercial developers of real estate. The latter were in their turn battered by the sagging economy.

The instance of Silver State Bank of Nevada can be cited as an example. It failed in September 2008 when two thirds of its loans were given to the construction group. There were other banks that could not survive the lash of the economic gloom. Colorado dairy producers failed to honour their loan commitments when milk prices suddenly fell nose down. This told on the sick lender New Frontier. In April the regulators shut down Greeley bank of Colorado.

The commercial real estate and small business enterprises are far from happy – they are struggling to keep afloat. This has led many experts to opine that the lenders servicing them will be especially hard hit in the forthcoming months.

Karen Dorway head of the research sector (bank rating) of Bauer Financial said, “We are seeing more stress on the commercial real estate side than at the end of last year.”

It is not merely predatory or wrongly timed loan advances that have ruined banks till now. They funding methods were risky causing banks to be badly mauled. It was their practice of using ‘hot money’ known as brokered deposits that ruined them. The sources of these funds were other entities looking around to park their dollars in the expectancy of above normal hot returns.

Banks like them because these lead to easy quick growth as they can in their turn grant more loans. But reliance on hot money is laced with risks. It is costly and volatile as the brokers keep shifting their dollars from one bank to another, hunting for the highest returns for their customers.