WASHINGTON -- Are commercial banks about to suffer the widespread failings that wrecked the savings and loan industry? Probably so, and taxpayers could get hit for $75 billion or more to bail them out, an exhaustive new industry analysis concludes.
Nearly 1,200 of the nation's banks are on footing so shaky they "are likely to fail or be forced into mergers over the next several years," according to "Banking on the Brink," a book released yesterday by the Washington Post Co.
Another 1,500 are confronting serious difficulties that could threaten their viability, according to authors Roger J. Vaughan, a financial consultant, and Edward W. Hill, associate economics professor at Cleveland State University.
At the root of the impending banking crisis, the authors say, is a precipitous national decline in commercial real estate values over a period when banks dramatically increased their holdings of such property.
In 1988, real estate accounted for 35.5 percent of the banking industry's total outstanding loans. By last year that figure had swollen to 42.3 percent, though 20 percent of the country's available office space was vacant.
Real estate now makes up 51.5 percent of the industry's nonperforming loans.
Banks assess the value of their holdings, or assets, based on the original value of those loans, Mr. Vaughan said. By discounting the value of those loans to reflect the current market for commercial real estate, Mr. Vaughan and Mr. Hill concluded that the industry is at least $82 billion short of the assets it needs to be considered healthy.
"Perhaps 1,150 banks are now insolvent and would be shuttered if their books revealed the true value of their assets," the authors wrote.
Not all banks are in trouble: Some are posting huge profits.
"America now has two banking industries. One is strong, profitable and internationally competitive. The other is dying," the report concludes.
The banking industry took sharp exception to the report.
"It's completely out of step with the industry's performance this year," said James Chessen, chief economist for the American Bankers Association, a Washington trade group that represents 90 percent of the industry, measured by assets.
Mr. Chessen said the nation's commercial banks earned $18 billion last year and another $16 billion in the first half of this year. In addition, he said, the industry has strengthened its overall balance sheet by adding $33 billion in equity and debt this year alone.
"The industry has turned the corner and is quickly regaining its health," said Mr. Chessen.
But Mr. Hill and Mr. Vaughan warn that a banking crisis looms that could rival the savings and loan debacle that has so far cost taxpayers $230 billion in bailout fees.