Thresholds set for oversight of bank loans

From Bloomberg News

Federal regulators issued guidelines Wednesday on the amount of commercial real estate loans that banks can hold without triggering greater oversight, a move widely opposed by small and mid-size banks.

The Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. set thresholds that when met would direct banks to take precautions, such as increasing the amount of capital they hold. Banks have opposed the thresholds out of fear that examiners would treat them as absolute limits on lucrative real estate holdings.

“These are benchmarks just to trigger heightened supervisory review,” FDIC Chairman Sheila Bair said, adding that the recommendations were not intended as caps on the loans.

The regulators issued the guidelines as part of an effort to stem potential bank failures. The agencies fear that a real estate market decline could cause the closure of institutions with high concentrations of the loans. Regulators have said banks hold more real estate than they did during a substantial market decline in the 1980s.


“They are a screen,” Comptroller of the Currency John Dugan said of the thresholds. “It’s a way for us to identify institutions with concentrations that require greater examination scrutiny to make sure they have appropriate risk management.”

The bank thresholds are set at 300% of a bank’s capital for commercial real estate loans and 100% for construction and land development loans. In addition, the regulatory agencies will consider whether an institution’s commercial real estate loan portfolio increased by 50% or more during the last three years.

The Office of Thrift Supervision, which regulates savings and loans, issued its own guidelines that omitted the thresholds.