As the business world ground back into motion following the holidays, area businesses were warned the economy could seize up, as banks”™ efforts to shore up their consumer home loan portfolios may be in turn weakening their financial footing for commercial real estate lending.
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In speeches this month, officials from the Federal Reserve Bank of New York and the Federal Reserve Bank of Boston expressed uncertainty about how the subprime crisis will affect commercial loans.
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In New York, the statewide delinquency rate on business loans decreased from 3.77 percent to 3.60 percent in the third quarter, according to the New York Bankers Association.
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“Although there has been some turmoil, regional and community banks continue to lend,” said Rae Rosen, an assistant vice president with the Federal Reserve Bank of New York. “Lending standards have tightened but money is still available. It really depends on the financial credit of the consortium involved (in a project).”
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Many local banks have yet to report fourth-quarter or year-end results, but Buffalo-based M&T Bank Corp. may have provided an early window on the developments to come. M&T, which ranks among the half-dozen largest banks in New York, reported a sharp rise in commercial loans due to companies”™ inability to obtain commercial paper, short-term financing that is not subject to the same regulatory requirements of traditional loans.
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Throughout the Northeast and the nation, commercial banks themselves relied on commercial paper to buy into the subprime market through off-balance sheet investment vehicles, according to Eric Rosengren, CEO of the Federal Reserve Bank of Boston, who aired the Boston Fed”™s analysis of the roots of the housing mortgage crisis in speeches this month in Connecticut and Vermont.
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While subprime loans made up only a fraction of those vehicles, Rosengren said, investors were still skittish of buying into them. Some of those banks are now moving those off-balance sheet vehicles back onto their books.
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Both trends could push banks up against their loan reserve requirements, which in turn could limit future lending for real estate development and other big-ticket corporate purposes. Rosengren said improved transparency in banks should shorten the current crisis ”“ though perhaps making it more painful, much like ripping a bandage off a wound.
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“Maintaining confidence in financial institutions and financial markets is key to a quick recovery from a crisis,” Rosengren said. “In today”™s situation, we are fortunate that most financial institutions have entered the current problems with significant capital cushions and that many U.S. financial institutions are moving to proactively address the problems.”
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Rosengren said the current situation could be mitigated to a degree by continued demand by area employers for talent ”“ and the need for affordable housing for those employees ”“ but did not attempt to sugarcoat the scenario.
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“The potential for a credit crunch remains,” Rosengren said. “Commercial banks are still an important source of liquidity and there are troubling developments at work.”
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Area bankers and developers said they are already seeing evidence of changed circumstances in commercial lending, which could have an impact on the short-term ability of Lower Hudson Valley developers to push projects forward.
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“We”™ve seen the financial markets change from ”˜capital for everyone;”™ to, ”˜no one can get anything,”™” said Kenneth McCarthy, an economist who is a managing director in the New York City office of Cushman & Wakefield
