by Kate Howell
New Mexico Business Weekly
July 14, 2006
SourceAs commercial real estate sales and construction surge across the country, federal officials worry that many banks are carrying more real estate loans today than during the 1980s boom.
And what the feds are doing about it has some community bankers shaken.
Several regulatory agencies -- including the Federal Deposit Insurance Corp., the Federal Reserve and the Office of Thrift Supervision -- are working on guidance that would implement a range of risk-management controls, such as strongly encouraging banks to have more capital if they have a significant number of commercial real estate loans.
To identify whether a bank's portfolio is becoming overly dependent on commercial real estate loans, the guidance sets thresholds: Banks with construction or development loans totaling 100 percent or more risk-based capital would have what regulators call a potential concentration.
Banks with construction, multifamily housing and commercial real estate loans totaling 300 percent or more also could be overly dependent on such loans.
If these thresholds are met or exceeded, a bank would need heightened risk-management practices, such as establishing clear risk standards, increasing oversight by their bank boards, having adequate capital and reserves, and planning for downturns, says Bill MaGrini, senior project manager at the Office of Thrift Supervision.
About one-third of all U.S. banks meet the thresholds laid out in the guidance. But Steve Fritts, FDIC associate director of policy, is concerned banks haven't installed the information management systems and management techniques they need.
Thus, the need for the guidance, he says: "We wanted to make sure that as banks grew, they had the tools to grow the commercial real estate business line."
But the proposed guidance is too vague, too simple and too broad, say some community bankers.
"Don't paint all the banks with the same brush," says Alan Rowe, president of the First Commercial Bank of Florida. "We already have very vigorous standards in place with risk-based capital."
It's also important to look at the types of commercial loans a bank is making, says Craig Polejes, president of Florida Bank of Commerce, which has 50 percent of its loan portfolio tied to commercial real estate. For example, he points out there are differences in risk between an owner-used mortgage and a real estate investment.
In addition, Rowe and Polejes share a concern that exceeding the thresholds will automatically result in the need for a capital increase.
But Fritts says that's a misunderstanding he saw repeated in the more than 1,000 comments the agencies received in response to the proposed guidance.
"If the nature of the loan is more high-risk or low-risk, then they need more capital," he says. "It wasn't meant to be automatic."