SunTrust Bank Sounds Alarm?
OK you need to stay with me on this one.
Colonial, a Montgomery, Alabama-based holding company, sought Chapter 11 protection, listing assets of $45 million and debts of $380 million. Its banking unit became the biggest bank to be seized by regulators since the collapse last year of Washington Mutual Inc.
The company provided funding for Taylor Bean & Whitaker Mortgage Corp., based in Ocala, Florida, the 12th-largest U.S. home lender, now suspended by federal agencies.
Yuji Saito, head of the foreign-exchange group in Tokyo said world economies are still doubtful. The yen strengthened after Atlanta- based SunTrust Banks Inc. said U.S. financial institutions may report more credit losses as commercial real estate falters.
Why is this an alarm, you ask? Disparities in banks’ loan values grew as the year progressed. When a loan’s market value falls, it might be that the lender would charge higher borrowing costs or, outsiders perceive a greater chance of default than management is assuming. Perhaps the underlying collateral has collapsed in value, even if the borrower hasn’t missed a payment. SunTrust Bank showed large divergence in their loan values. It showed a $13.6 billion gap as of June 30, which exceeded its $11.1 billion of Tier 1 common equity.
SunTrust is saying commercial real estate is next to fail. SunTrust had $15.9 billion in commercial real-estate loans as of June 30, or 13 percent of $122.8 billion in loans, according to a presentation to investors last week. The bank was not receiving interest on less than 1 percent of the commercial real-estate loans, SunTrust said.
Is it arbitrary accounting like Arthur Andersen provided? Fair-value estimates in the short-term can be a poor indicator of an asset’s eventual worth, especially when markets aren’t functioning smoothly and market prices are falling. The problem with relying on management’s intentions is that they may be even less reliable.