Banking Law

In the latest example of closing the barn door when there are no horses left inside, Comptroller of the Currency John Dugan announced that federal bank regulators are going to crack down on commercial real estate lending by commercial banks.

Regulators are weighing several options, he said, including tougher concentration caps, increased capital requirements, minimum underwriting standards and limits on banks that use wholesale funding to finance these loans.

"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 noncore funding," Dugan told the Independent Community Bankers of America conference in Orlando. "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."

It didn't work as well as you liked because by the time the regulators issued it, it was too late. Many community banks that had few profitable alternative investment sources were up to their eyeballs in CRE loans by 2006, and the "guidance" was just that: "guidance." It didn't ban CRE lending in excess of suggested limits, but warned banks that they'd have to justify how they managed the risk of excess concentrations. Give a man enough rope, etc., etc. Plus, the widespread commercial real estate woes are not the result of speculative lending practices and dysfunctional loan structuring, they're the result of the general economic meltdown that followed the subprime mortgage debacle. Collateral values have been hammered (not in small part by aggressive examiners), and CRE  loan borrowers and their properties are suffering.

It's not that excessive CRE concentrations shouldn't be discouraged or that a further consideration of this area isn't warranted, but it's not as though community banks are rushing full-bore to beef up their CRE loan portfolios today. There isn't an urgent need to throw "stop-strips" in front of runaway bankers hot to snag more of that sweet CRE. Instead, bankers are trying to deal with the CRE that they've currently got in their portfolio and can't unload without running the bank off the rails. THAT is where attention needs to paid. THAT's the problem with the most critical need of a solution.

Thus far, the program from D.C. seems to be (A) to do nothing to save those community banks that are being overwhelmed by CRE losses; (B) to take actions that ensure that such banks enter a death spiral from which they will not emerge alive; (C) take the CRE from failed banks into the FDIC, where it will be packaged and sold for prices and on terms that make scads of money for the private purchasers; (D) retain upside potential in sold CRE in the FDIC (rather than the failed banks that originally held the stuff); (E) publicly encourage bank examiners to be "fair and balanced" while privately letting them be as strict as they can be; and (F) publicly encourage community banks to lend to credit worthy small business borrowers while privately doing everything possible to ensure that they won't be able to do so.

Have I left anything out?