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By Matthew Quinn
As more banks are toppled over by commercial real estate (CRE) loans, regulators are ready to reexamine guidance given just four yeas ago concerning concentration limits for such loans.
Comptroller of the Currency John Dugan said on Friday that policymakers should consider a range of options such as harder limits, increased capital requirements, a more granular approach to defining concentrations (since not all CRE is the same), minimum underwriting standards, more stringent requirements for loans supported by substantial amounts of non-core funding, or some combination of the above.
"Given what we know, I think we need to revisit the issue of the appropriate regulatory response to CRE lending concentrations, especially for construction and development lending, and especially for concentrations supported by non-core funding," Dugan said in a speech before the annual convention of the Independent Community Bankers of America in Orlando on Friday. "While the concentration guidance we issued in 2006 was necessary - even though it was opposed by many parts of the industry - in retrospect, it has obviously not worked as well as we would have liked."
In 2006, the OCC proposed two thresholds for CRE concentration. The first stated that if loans for construction, land development, and other land were 100 percent or more of total capital, the institution would be considered to have a CRE concentration and should have heightened risk management practices. Secondly, if loans for construction, land development, and other land and loans secured by multifamily and nonfarm nonresidential property were 300 percent or more of total capital, the institution would also be considered to have a CRE concentration and should employ heightened risk management practices.
While the wave of failures that first hit the bank industry starting in 2007 were largely the result of soured residential mortgages, the most recent banks to go under have had loan books heavily concentrated in CRE.
For the 205 banks that have failed since 2007, a third of their loan portfolio has been made up of commercial real estate loans, compared to an industry average of 26.9 percent, according to investment bank KBW. The seven banks seized by the Federal Deposit Insurance Corporation last Friday had an even higher concentration with almost 40 percent of their loans tied up in commercial real estate.
Bank failures this year are widely expected to surpass the 140 banks closed in 2009.
An unofficial problem bank list compiled by the Calculated Risk blog included 653 institutions with assets of $332.0 billion for the week ended March 19, up from 640 institutions with assets of $325.6 billion a week earlier.
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