The Federal Reserve is focusing it’s efforts these days on bank regulation. There is a fear that banks are exposed to a dangerous level of commercial real estate loans and that a repeat of the failures that occured in the 1980s is possible. A signifcant downturn in commercial real estate could create a series of bank failures that could impact the economy.
Banks are working with the Fed to keep these guidances as threshholds not hard ceilings as it could severely diminish their opportunity to do deals and create new revenue opportunities. While I do not want to see the marketplace tighten too much by government regulation, it also is the price that needs to be paid if these banks are going to be insured with government funds.
The Federal Reserve, Office of the Comptroller of the Currency and other regulators issued guidelines telling bank examiners to take a closer look a lenders’ commercial real estate portfolios when loan levels reach certain thresholds. Banks with high concentrations might have to make management changes and raise capital reserves.
Fed Gov. Susan Schmidt Bies said the guidance was designed to “ensure that healthy and profitable banks can continue serving the economic development needs of their communities.”
The regulators want to prevent any repeat of the 1980s, when the real estate market plummeted, taking many banks down with it. Regulators note that small and midsize lenders have a higher concentration of real estate loans now than in the 1980s.
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Under the guidance, banks with construction and development loans totaling 100% or more of capital would have a potential concentration. Banks with construction, multifamily housing and commercial real estate loans at 300% or more of capital also are potentially concentrated. Added to the threshold for closer scrutiny is if lenders’ real estate loan portfolios rose 50% or more in the past three years. via USATODAY.com.
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