Bank of America Corp (BAC), Wells Fargo & Co (WFC): Here’s Why the Business Loan Boom May Be the Next Bust

But, as a piece in The New York Times points out using Huntington Bancshares Incorporated (NASDAQ:HBAN) as an example, this boon isn’t all it seems. As newer loans with much lower interest rates cram the C&I portfolios and defaults begin to show up, trouble can ensue. A bank seeing an average 4% yield on its stable of business loans today, like Huntington Bancshares Incorporated (NASDAQ:HBAN), may be looking at a dangerously low 1.64% a few years down the road.

While the Times notes that the analysis isn’t foolproof, the Fed was concerned enough to release — for the first time since 2001 — new guidelines for banks dealing with these types of leveraged loans, rules that are scheduled to become effective this week.

Too little, too late?
Whether the new regulations have arrived in time to prevent a bust in the commercial sector similar to the one seen with home mortgages remains to be seen. Some banks, at least, are recognizing the risks and staying away. As M&T Bank Corporation (NYSE:MTB) vice chair Mike Pinto tells the Financial Times, “Every 10 years or so, banks make some horrible mistake, and it usually starts with easy money.” Hopefully, this time, such a calamity will be avoided.

The article Here’s Why the Business Loan Boom May Be the Next Bust originally appeared on Fool.com is written by Amanda Alix.

Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Fifth Third Bancorp, Huntington Bancshares, JPMorgan Chase, KeyCorp, and Wells Fargo.

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