GAO Opposes Less Strict Loan Reviews : Banking: If examiners are more lenient in forcing write-offs on real estate loans, bank failures could increase, the agency says. The rules were loosened to try to help ease a credit crunch.
The General Accounting Office issued a blistering attack Wednesday against plans for federal examiners to be more lenient in reviewing real estate loans at banks and warned that such action could temporarily disguise problems and lead to more bank failures later.
Federal bank examiners will be “handcuffed” by new rules that were recently adopted by four federal regulatory agencies, Comptroller General Charles A. Bowsher told the House Banking Committee. “We want the accounting to be done right,” Bowsher told reporters after his testimony. “We are not sure where the emphasis will be put--will it be on the optimistic or the realistic?”
Widespread complaints from bankers, business executives trying to borrow money and politicians persuaded the major regulatory agencies to adopt new guidelines for their examiners.
The critics said tight regulation was contributing to the credit crunch.
The guidelines, which are backed by the Bush Administration, say loans to commercial real estate projects should be viewed according to their potential value in a stable market, not according to their actual value in a depressed market.
GAO staff members have been rebuffed in their request to attend the closed meeting next week in Baltimore, when several hundred federal regulators will discuss the guidelines for evaluating real estate loans, said Donald H. Chapin, an assistant comptroller general.
The guidelines issued last month may allow “real estate evaluations that hide loan losses,” Bowsher told the committee. If loans are treated too optimistically, he said, “there will be more banks failing without reasonable warning, the extent of losses will be hidden and the regulatory process will be severely hampered.”
The handling of these loans has become a hot issue because real estate is the biggest source of business for the banking system, accounting for nearly 25% of all loans.
The glut of commercial real estate--about half the nation’s supply of office space was built in the past 10 years--has driven down prices for office buildings, shopping centers, condominiums and other properties.
Federal examiners make the judgment whether banks should set aside large reserves of cash to cover anticipated big losses on their real estate loans. And the buildup of reserves means less money is available to make new loans.
Bowsher also warned that the new policy, combined with a clouded economic outlook, could render Congress’ recently approved $70-billion government loan for the Bank Insurance Fund insufficient. Problems at some banks could be overlooked, contributing to failures later.
One agency head involved, Federal Deposit Insurance Corp. Chairman William Taylor, strongly denied Bowsher’s assertion that the regulators are in danger of being too soft on real estate loans.
“We want to make damn sure our policies are sensible and are applied in a sensible way,” he said in an interview. “The last thing I want is to make examiners back off. But the message we’re trying to give is to make doubly sure what we’re doing is logical.”
Taylor said bank examiners can be caught in a dilemma--fear of being hauled before a congressional hearing for not having been tough enough on real estate loans before a bank failed and fear of being pilloried by bankers and business executives for being too tough and causing a credit crunch.
Making judgments on the probability of a real estate loan being repaid is an “art” rather than an absolute mathematical process, Taylor said.
In addition to the FDIC, the other agencies adopting the guidelines on real estate loans include the Federal Reserve Board, the Comptroller of the Currency for banks and the Office of Thrift Supervision for savings and loan associations.
