Feds’ New Regulations On Commercial Real Estate Loans Concern Some Florida Banks

As commercial real estate sales and construction surge across the U.S., officials are increasingly worried that banks are carrying more real estate loans today than during the 1980s boom — which resulted in a rather hard landing when the bottom fell out of the market.

What the government is planning on doing about this has left some community bankers shaken.

Regulatory agencies such as the Federal Reserve, the FDIC, and the Office of Thrift Supervision, are working on guidance that would implement a range of risk-management controls, such as strongly encouraging banks to have more capital on hand if they are carrying a significant amount of loans tied to the potentially volatile commercial real estate market.

To identify whether a particular bank’s portfolio is becoming overly dependent on commercial real estate loans, the guidance sets several thresholds:

• Banks with construction or development loans totaling 100 percent or more risk-based capital would qualify as what regulators term a potential concentration.
• Banks with construction, multi-family home and commercial real estate loans totaling 300 percent or more also would be overly dependent on such loans, in regulators’ estimation.

If these thresholds are met or exceeded, then a bank would need heightened risk-management practices, such as establishing clear risk standards, increased oversight by their bank boards, having adequate capital and reserves, and planning for downturns.

About one-third of all U.S. banks meet the thresholds laid out by the regulatory agencies. But Steve Fritts, the associate director of policy for the FDIC, is concerned banks haven’t installed the adequate information management systems and management techniques they need.

“We wanted to make sure that as banks grew, they had the tools to grow the commercial real estate business line,” Fritts said.

But the proposed guidance is too vague, too simple and too broad, some community bankers argue.

“Don’t paint all the banks with the same brush. We already have very vigorous standards in place with risk-based capital,” Alan Rowe, President of the First Commercial Bank of Florida, said.

It’s also important to look at the types of commercial loans a bank is making, adds Craig Polejes, President of Florida Bank of Commerce, which has 50 percent of its loan portfolio tied up in commercial real estate. For example, there are differences in risk between an owner-used mortgage and real estate investments.

Rowe and Polejes share a concern that exceeding the thresholds will automatically result in a forced capital increase for Florida banks, but Fritts says that’s a common misunderstanding of the new policy.

“If the nature of the loan is more high-risk or low-risk, then they need more capital. It wasn’t meant to be automatic, he said.”