Seattle Bubble

Kirsten Grind had an interesting piece about local banks in the Puget Sound Business Journal last Friday: Bad loans rising at Washington banks

Bad loans are up dramatically at Washington state banks, surpassing the national average and reaching levels that local banking experts say are unprecedented.
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Washington banks historically have seen lower levels of problem loans than their counterparts across the country. But their heavy construction lending has hit them hard in the wake of the housing slowdown, said Brad Williamson, director of the Division of Banks at the Washington State Department of Financial Institutions, which regulates state banks.
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How bad is it? Since the height of the housing market in the middle of 2006, Washington state’s 97 banks — both publicly traded and private — have seen their problem loans jump from an average of 0.42 percent to 2.71 percent of all assets, according to the most recent data available from the Federal Deposit Insurance Corp. That compares with a national average of 1.89 percent.

As a counterweight to bad loans, regional banks are bulking up with more capital, which acts as a buffer to the problem loans. And most publicly traded banks across the Puget Sound region are considered well capitalized.
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But a well-capitalized bank can still fail, and several already have. Both Washington Mutual and IndyMac, of California, were well-capitalized by federal regulatory standards in their last quarterly reports before their historic failures this year.

The basic message seems to be that local banks are in slightly more pain than the national average in terms of bad loans, but that bad loans aren’t a particularly useful predictor of bank failures.

I was surprised to read that local banks actually have a higher percentage of bad loans than the national average. That would seem to fly somewhat in the face of the “Seattle is special” mantra of many local economists.

(Kirsten Grind, Puget Sound Business Journal, 11.14.2008)