Fed May Limit Banks’ Actions in Real Estate
The Federal Reserve Board, trying to keep abreast of changing state laws, issued proposals Wednesday to control the real estate activities of bank holding companies under its control.
Chairman Paul A. Volcker and several board members expressed reservations about the wisdom of banks getting into what Vice Chairman Preston Martin called “this known risky business.”
But Martin said that “as long as Congress doesn’t act, we don’t have authority to stop this, and if we fail to act, we forgo authority to deal with the soundness of the system.”
Martin said lawyers are constantly coming up with “strange and wonderful devices” to find loopholes in banking laws and that banks feel that they are being forced into such new fields as real estate to maintain profitability.
Volcker disagreed with Martin’s assertion that the banks might be correct in their judgment that they must move into new market areas to survive.
“My opinion is that some of the banks doing best are doing a traditional banking business,” said Volcker.
60-Day Comment Period
Making a point of not characterizing the rules as a formal proposed regulation, the seven-member board said they were intended to indicate where the Fed was likely to head after a 60-day comment period.
The staff was instructed to issue a long list of specific questions with the understanding that the answers could result in extensive revisions of the proposals before any regulations are formalized.
Board members emphasized that they were determined to act in concert with the Federal Deposit Insurance Corp., which issued a similar set of proposals in December on limitations it expects to place on federally insured banks that move into such traditional non-banking areas as real estate, insurance and securities trading.
The Fed proposes four basic restrictions:
- Any real estate investment would have to be carried out by a separate subsidiary to minimize the direct risk to the parent bank holding company. And the subsidiary would have to act in concert with a partner or partners that would have control over the development and would have a substantial financial stake in its success.
- Capital invested in a real estate subsidiary would not be counted toward the parent company’s overall reserve requirement.
- The percentage of investment would be limited, perhaps on a sliding scale to take into account the size of the bank holding company, and the subsidiary would be limited in the amount of outside money it could raise to go with what it obtained from its parent company for a real estate venture.
- Aside from direct investments, there would be limits on how much any bank or any other subsidiary of a bank holding company could lend the real estate subsidiary to finance a real estate deal.
