Tuesday, April 25, 2006

Regulator ruling could hit banks on real estate lending - Charlotte - MSNBC.com 

Do banks have too many commercial real estate loans in their portfolios? Federal bank regulators are assessing whether banks are crossing a threshold of acceptable construction and development loans.

In recent examinations, bank regulators say they have found risk-management practices and capital levels at some institutions have not kept up with their growing commercial real estate portfolios. Some banks have expanded their lending into new markets without doing enough analysis. Others don't have enough capital to absorb losses if their real estate loans turned sour.

Mark Schmidt, a regional director of the FDIC's division of supervision and consumer protection, says a particular area of weakness has been in management information systems, which banks use to break down their portfolios by property types, loan structures, developer concentrations and other ways to determine risk.

"What we're seeing is pretty good underwriting, but the underlying management information systems to track, monitor and manage concentrations has been lacking," he says. "But that's not a real costly situation, and it's something banks ought to be doing anyway." The agency has no problem with banks making commercial real estate loans, Schmidt adds, "as long as they do it well."

Regulators have suggested two thresholds around commercial real estate loans for banks to determine if they need heightened risk-management practices: construction and development loans that match or exceed a bank's capital, or commercial real estate loans three times a bank's capital amount or higher. Construction and development loans have been the fastest-growing segment among commercial real estate loans, according to the FDIC.

Concern on the part of regulators is one thing but as long as proposals aren't so alarmist that they actually needlessly hurt banks that are doing the right things anyway.

Regulator ruling could hit banks on real estate lending - Charlotte - MSNBC.com


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