NEW YORK Comptroller
of the Currency John C. Dugan told a conference of bankers today that while
concentrations in commercial real estate lending do raise safety and soundness
concerns, bank regulators believe they can be safe if they are effectively
managed.
Our message is not,
Cut back on commercial real estate loans, Mr. Dugan said in a speech to the
New York Bankers Association. Instead
it is this: You can have concentrations
in commercial real estate loans, but only if you have the risk management and
capital you need to address the increased risk. And in terms of the
risk management and capital you need, were not talking about expertise or
capital levels that are out of reach or impractical for community and mid-size
bankers because many of you already have both.
The Comptroller noted
that 30 percent of national banks hold commercial real estate loans in amounts
exceeding 300 percent of capital and said that nearly all of these institutions
are mid-size or community banks.
Commercial real estate lending has historically been a volatile
business, he noted, adding that it clearly played a role in the banking crisis
of the late 1980s and early 1990s.
The degree to which
banks participated in the run-up of the commercial real estate market in the
early 80s was one of the best predictors of subsequent bank failure, the
Comptroller said. On average, banks
that failed had nearly three times as many commercial real estate loans as a
percentage of their total assets as banks that did not fail.
In the last several
years, he said, the OCC has found erosion in some key areas: lengthening
maturities, increasing policy exceptions, narrowing spreads, and a lack of
independence and quality control in the appraisal process. In addition, the OCC found that risk
management practices were not keeping up with the growth in commercial real
estate concentrations.
Although it was these
recent trends that led regulators to propose new guidance, the proposal is, at
its core, simply a restatement and amplification of the supervisory guidance
that the agencies developed in the wake of widespread bank failures
precipitated by commercial real estate lending less than 20 years ago, he said.
What the new guidance
does for the first time is provide a simple definition of what we mean by
commercial real estate concentrations, Comptroller Dugan said. The definition is intended to answer the
questions we have received over the years from many bankers frustrated with the
ambiguity and lack of clarity of our previous guidance.
The proposed guidance
provides more straightforward concentration thresholds that, once crossed,
trigger the need for enhanced risk management and capital levels, he said. One threshold is defined as those commercial
real estate loans made for construction, land development, or other land that
in the aggregate exceed 100 percent of capital. The second threshold applies when all commercial real estate
loans made by a bank exceed 300 percent of capital.
The Comptroller said
the benchmarks are not hard caps that would force banks to cut their commercial
real estate lending. Far from being caps, these numbers are simply screens to
determine where enhanced risk management and adequate capital is needed, as
the guidance makes clear, Mr. Dugan said.
We are emphasizing this very point that the thresholds are triggers
for better prudential practices, not caps in discussions with our examiners
in every region of the country.
Our focus in applying
this guidance will be first and foremost on risk management practices, Mr.
Dugan said. To the extent that an
institution with a concentration exceeding one of the thresholds has enhanced
risk management practices in place, or is moving in that direction, our concern
with increased capital is greatly reduced.
Moreover, the
Comptroller said, the overwhelming majority of institutions with real estate
concentrations already hold capital cushions that exceed regulatory minimums
and that these institutions generally should not be affected by the capital
adequacy requirement in the proposed guidance.
Needless to say, when
it comes to commercial real estate, we as regulators and you as lenders should
be doing all that we can to avoid both increased bank failures and a credit
crunch, Comptroller Dugan said. The
best way to do that is to address smaller concerns effectively before they grow
into much bigger problems that precipitate more extreme actions and
reactions. Thats precisely what the
proposed guidance is intended to do.
In sum, we recognize
that commercial real estate lending has been and will continue to be a very
good business for banks all banks provided that it is effectively managed,
Mr. Dugan concluded. At the end of the
day, that is the very essence of the proposed guidance.
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The Office of the
Comptroller of the Currency was created by Congress to charter national banks,
to oversee a nationwide system of banking institutions, and to assure that
national banks are safe and sound, competitive and profitable, and capable of
serving in the best possible manner the banking needs of their customers.