Toxic commercial loans plague small banks

WASHINGTON, Oct. 11 (UPI) -- Toxic commercial real estate assets held by small U.S. banks are threatening their survival and the broader economy, analysts say.

With 100 failures of small banks so far this year, the Federal Insurance Deposit Corp., which insures depositors, has seen its $50 billion fund fall into the red and is now seeking to replenish it by levying higher fees on healthy banks, The New York Times reported Sunday.

Experts told the newspaper they expect more small bank failures, especially in the U.S. South and Midwest, where lenders loaded up their balance sheets with loans to homebuilders and commercial developers in an effort to replace lost credit card and mortgage lending business that went to bigger competitors. With many of those deals souring, those lenders who can't raise fresh capital will go under.

"These banks were big enough that they could do loans that were fairly sizable," John Chrin, a former investment banker who is now an executive in residence at Lehigh University, told the Times. "If they go bad, they are toast."

Federal regulators took over 11 banks in nine states in September alone, all of which were saddled with soured commercial real estate loans, the newspaper reported.