Banking Law

Fox Business News ran a decent article (as hard as that may be for some left-leaning readers to believe) by Darryl R. Isherwood not long ago on community and regional banks and their commercial real estate loan problems. It supports some of the viewpoints spouted on this blog, such as the fact that small banks concentrated so heavily on commercial real estate lending because of a lack of practical alternatives.

Analysts say that as mortgages and consumer lending became more lucrative, larger banks snapped up the bulk of the business, leaving little but crumbs for smaller banks. In need of revenue, the community banks turned to commercial real estate loans, a natural fit given the banks? connections within and knowledge of the communities they serve.

A booming housing market made construction loans for multi-family residential properties a gold mine, while low unemployment made office construction loans a stable revenue source.

But if commercial real estate was a great fling in good economic times, it became a harsh mistress as the economy began to crumble.

?The real problem is the regional banks just didn?t stop,? said Jim Kaplan of Audit Integrity, an independent research firm. "They started over-lending and loan-to-values on commercial real estate got way out of whack. The prices overshot the mark because people could borrow money cheap.?

Banks were left holding the proverbial bag as the equity owners walked away from properties, leaving the banks as proud owner of real estate worth a fraction of the loan value.

?Right now they are extending and pretending on the hopes that the property value recovers,? Kaplan said.

If many small banks are "extending and pretending," it's because many of them don't wish to die, which would happen to them (as it has already happened to hundreds of their brothers and sisters during the past two years) if they "mark-to-market" their CRE loan collateral. "Death Wish" was a heck of a hit for Charles Bronson back in the day, but most of us who are sane prefer not to commit suicide. Besides, the FDIC and some of the other federal regulatory agencies give lie to the "extend and pretend" mantra. As many smaller banks have discovered, not recognizing CRE losses is not in the federal regulators' playbook.

Mr. Isherwood also alleges that the problem was exacerbated by an influx of newly chartered banks. The management officials of many of those banks, Mr. Isherwood contends, were poorly equipped to underwrite commercial real estate loans and went hog-wild in search of "easy earnings." If that was the case, the regulators have closed that barn door after the horses. It's harder now to snag a new bank charter than it is to find the word "compromise" uttered by a member of the US Congress.

The article also discusses the "guidance" issued by the federal bank regulators in 2006 that "recommended that any bank with a concentration of commercial real estate loans over 300% of total capital employ heightened risk management for the loans." As any community banker with CRE in its portfolio knows, the "guidance" has become a de facto "rule," notwithstanding public verbal assurances to the contrary from certain regulators. "Heightened risk management" has come to mean "a plan to immediately reduce commercial real estate loan levels to below 300% of total capital.

The biggest (bitter) laugher for small bankers comes near the end of the article, when Isherwood discusses Sheila Bair's public utterances about community banks.

The concern, FDIC chairwoman Sheila Bair told a gathering of community bankers last month, is that as more banks fail, less money is available for lending to small businesses, the largest catalyst of job growth in the United States.

?Community banks are essential to the economy, but many of them are experiencing acute credit distress,? Bair told the bankers. ?Community banks are doing more than their share under difficult circumstances to provide the capital that will be needed to create jobs in the recovery. Small businesses create two-thirds or more of all net new jobs. And they overwhelmingly rely on credit provided by community banks.?

Well, Sheila, quit forcing these banks to mark-to-market all of this illiquid collateral that has no current "market" other than vultures, or get behind a plan to let them amortize the losses you're forcing them to recognize over a ten-year period for regulatory capital purposes rather than taking the full amount of the loss immediately. That will help alleviate a lot of the "acute credit distress" for many of them and let them "provide the capital that will be needed to create jobs in the recovery."

Yes, we know: we're a broken record. Get used to it.