This is not over yet, folks
The U.S. banking system remains vulnerable to sizeable potential losses as the housing market struggles to recover.
Estimates of these losses range from $500 billion to $1 trillion (£312 bn – £625 bn). The Federal Reserve Board is especially concerned about the impact of commercial real estate on many regional and small banks across the country. Occupancy and rental rates continue to decline dramatically as 2009 draws to a close, and the worst seems yet to come.
Commercial real estate loans on banks’ balance sheets total almost $1.1 trillion dollars. With near-term commercial real estate losses topping $100 billion, the Wall Street Journal estimates that as many as one-third of small and mid-size U.S. banks could experience financial distress.
Troubled banks restrict lending until they can raise more capital. In this illiquid market, expect banks to fight for survival by raising lending rates, shortening maturities, and lowering loan amounts. Credit will continue to shrink in the U.S., which spells big trouble for any economic recovery.