Two years ago in this space I commented on admonitions from Comptroller of the Currency John C. Dugan about commercial real estate concentrations in community banks. In that March 2008 Perspectives column I pointed out that bankers were telling me they took what the market offered — commercial real estate loans, not auto dealers’ floor plans.
The comptroller warned that his agency would focus increased attention on problems arising from high community bank concentrations in commercial real estate. Sure enough, exams got tougher and agreement letters and cease and desist orders began falling like snowflakes.
Last month, the Congressional Oversight Panel was beating the same drum when it released a report, “Commercial Real Estate Losses and the Risk to Financial Stability.”
“The panel is deeply concerned,” the Feb. 11 announcement said, “that a wave of commercial real estate loan losses over the next four years could jeopardize the stability of many banks, particularly community banks, and prolong an already painful recession.” The wise men and women on the panel had made an astounding discovery: “Community banks, unlike the largest Wall Street banks, face the greatest risk of insolvency due to the mounting commercial real estate loan losses.” Wall Street banks, it should be pointed out, enjoy a wider array of offerings from the market, such as risky derivatives and bundles of exotic mortgages that killed some big players and threatened others with insolvency.
Justifiable umbrage to the oversight panel’s report was taken by the American Bankers Association. “Today’s report by the TARP Oversight Panel on real estate loans presents a misleading picture of community bank financial strength,” said a statement by ABA President and CEO Edward L.Yingling. “It contains sweeping generalizations about the health of all banks based on summary data without the understanding of any one bank’s condition.
“It has been clear for many months that some community banks are dealing with difficulties in their commercial lending portfolios, and bank regulators have moved very aggressively to address this issue. In fact, a number of commentators have stated that they think the regulators are being too aggressive, and President Obama has said on two occasions that he is concerned that regulators may be going too far,” Yingling continued.
“The real issue for a number of banks is the lack of access to capital. The ABA has been urging Treasury for over a year to invest in banks that are struggling but viable. However, the government’s investments to date have left those community banks on the sidelines that would most benefit from some help.
“Policymakers and the banking industry share the goal of ensuring that banks continue to meet the credit needs of their communities in a responsible fashion,” the statement concluded. “To achieve this goal we must avoid inappropriately conservative policies that lead to what some have called a reckless prudence.”
Something else that might help is the attitude adopted by Kansas City-based consultant Jerry Swords of Swords Associates Inc. when he was in charge of bank supervision at the Federal Reserve Bank of Kansas City. Well-acquainted with community banks and their role, he considered himself an advocate. That concept, which evidence suggests is sadly lacking today, might help save some community banks that otherwise will likely fail.
Bill Poquette is editor-in-chief of BankNews.
Copyright © March 2010 BankNews Media