Small Banks, Tight Credit

Washington Post (08/27/08) P. D1; Appelbaum, Binyamin; Cho, David
New data from the FDIC shows that the delinquency rate on construction and development loans topped 8.1 percent as of the end of June--the highest rate for any category of bank loans. The missed payments are forcing many banks to tighten lending standards, some to hoard money against possible losses and others to curtail lending to new customers altogether in an effort to conserve available funds for existing customers. Small banks are among those suffering most, as many flocked to construction and development lending during the boom because it was one of the few areas where they could compete with bigger banks by nurturing relationships with developers and shouldering risk. The profit margins of small banks that focused on such lending shrank below the margins for other small banks in the first three months of this year for the first time since the boom started, and many are now struggling with defaults on loans to home builders.