Losses on Banks' Big Loans: $53 Billion

By DAVID ENRICH A record-breaking surge in problems among giant loans is likely to spell trouble for many banks. Federal regulators on Thursday reported that banks and other institutions are facing $53 billion in losses on loans of at least $20 million that were financed by three or more banks. The level of losses on these loans, used to finance commercial real-estate projects, corporate buyouts and other big-ticket ventures, was nearly triple the prior record set in 2002. It also eclipsed the total losses identified over the past eight years. The results of the so-called Shared National Credit exam, conducted yearly by the four federal bank-regulatory agencies, are likely to force many banks in the third quarter to charge off more loans and to set aside additional funds to cover future defaults. "These results are a disaster," said Gerard Cassidy, a banking analyst at RBC Capital Markets. "Banks are going to be forced to build up reserves. ... This will have a tangible impact on banking results" in the third quarter. The pain is expected to be especially severe for large regional banks. Many such lenders were helping to underwrite huge loans with lax terms until mid-2007, when the credit crisis started to intensify as housing markets collapsed. In the second quarter, regulators started informing the nation's top few banks about the exam's findings, leading those institutions to write down some big loans. Starting last month, regulators began to disclose their findings to smaller banks. Already, some banks have warned that the federal exam will depress third-quarter results due in mid-October. Last week, Fifth Third Bancorp of Cincinnati said at a New York conference that it expects to suffer about $110 million in loan losses in the third quarter due to the exam. Chief Executive Kevin Kabat called the figure "higher than we expected." "The exam seems to have been more rigorous than usual, which is probably appropriate in this environment," Mr. Kabat said. The regulators' bleak findings contributed to a broad sell off in bank stocks on Thursday, analysts said. The KBW index of bank stocks sank 2%. The exam also points to trouble for financial institutions other than U.S. banks that are holding troubled loans. The regulators said that foreign banks hold about 38% of the $2.9 trillion in loans that were examined in the survey. About 21% of the loans are held by hedge funds, insurance companies, pension funds and other entities. But such nonbanks hold a disproportionate share of about 47% of loans that were classified as problematic. Write to David Enrich at david.enrich@wsj.com