Ben Bernanke says it’s over. So does President Obama, the stock market, and several economic indices. Yet, has this current recession, a “gift of the lending exuberances, excesses, and financial gymnastics of recent years” really stopped giving? The answer appears to be “No”. Like a crash scene in slow motion we find out in the September 25^th Wall Street Journal that the Shared National Examiners have $53 billion in losses that needs to be accounted for. What gives? Haven’t the banks reserved and reserved and reserved again?

The answer is yes and no. The Shared National Exam, like March Madness, is an annual event in late March and early April where national bank examiners look at all loans with three or more participants where the commitment exceed $25mm. The loans are examined at the agent bank and if no banking institution is agent, at one of the larger banks. The examiners either “pass” the loans on a one by one basis or “fail” the loans by calling them either temporarily impaired or permanently impaired. There are very exacting reserve requirements associated with this judgment call and the examined banks are told the news usually by end of April.

What happens next is that these examined or agent banks will take their losses in the second quarter. However, and this is a very important distinction, the participant banks are not formally notified by the examiners of the bad news until the following August.

What this means is that a whole lot of participants were told this August of the loss reserves they now must take… to whit the WSJ article. Is there any good news we can take from this? I think we can assume that at least as to leverage lending, this past exam should mark the bottom of the bad news bin. As the “new normal” lending standards have been in place for at least all of 2009 and, arguably, most of 2008, the loans that got dinged were the pre-recession loans that are hanging around and showing just how hard it is to operate with both hands tied behind your back (too much leverage).

Third quarter numbers will be humbling. Fourth quarter should show strengthened reserves and 2010 means a whole set of new loan goals for the legions of lenders out there.

Gail Long is a Senior Consultant to Getzler Henrich & Associates as well as W Capital Partners, and a current member of the board of ACG Boston.  She is a regular contributor to The Dealmaker.

This entry was posted on Tuesday, October 6th, 2009 at 11:25 am and is filed under Guest Post, Industry Commentary. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.