Banking Law

Concentrating on Commercial Real Estate

Reports of increased scrutiny of banks--particularly community banks--because of deteriorating commercial real estate values keep piling on. In Boston, the local business press seized upon the fact that commercial real estate concentrations at several local banks "soared past" the "limit" of 300% of capital set forth in federal bank regulatory agency guidelines. Bank executives tried to put a smiley face on these figures, one even evoking a vision of an empty office tower in Houston and saying "that ain't us." However, I doubt anyone's buying that line. First, Houston circa 1988 is not Houston today. Today, Houston is doing better than just about any other major metropolitan area in the US, thanks in no small part to the fact Texas was hit so hard the last time around the block that Texas didn't have the real estate bubble that has burst all over places like Georgia, Florida, Illinois, Nevada, Arizona, and California. Houston also is home to large oil and gas companies, and those folks are rolling in dough at the present time. Just ask Lexus where it's selling and leasing the most cars in the US. If we're talking "empty office towers" during the current melt down, look at south Florida, not Texas.

In fairness to the banks profiled in the article, they seem to be taking steps to meet regulators' concerns, including "kicking the tires," tightening lending standards, lowering loan-to-value ratios, raising additional capital, and otherwise showing the regulators that they are proactively dealing with the increased risk. Not one of them was mentioned in the article as currently being under any type of formal or informal enforcement action because of their concentration in commercial real estate lending.

Nevertheless, banks like these can certainly expect extra special attention from their primary federal regulator for the foreseeable future. As guest blogger John Walker chillingly pointed out a few weeks ago, "the CRE problem is real." As he also predicted, the problem is going to get worse, maybe a lot worse. As long as that's the case, banks with high concentrations of commercial real estate loans in their portfolio--regardless of their perceived quality and regardless of whatever other arguments the bank makes in the way of risk mitigation--will be in the examiners' cross-hairs.

Full post as published by Bank Lawyers Blog on November 23, 2009 (boomark / email).