NEW YORK -- The proposed step up in risk monitoring and capital add-ons for community banks engaged in commercial real estate lending recently made the front page of the Wall Street Journal.

The rapid growth in commercial real estate loans, which has gone up 16% to $1.3 trillion in 2005, has prompted financial regulatory agencies to put the brakes on "aggressive" lending in an effort to stave off what happened between 1987 through 1994, when more than 1,100 banks and nearly 1,000 savings-and-loan institutions failed or required financial assistance as a result of overbuilding and vacant properties, the publication reported in a Sept. 11 article.

A hearing on the issue before a House subcommittee was scheduled for Sept. 14 when regulators were expected to issue final guidelines after that. The Wall Street Journal reported that "If regulators are too lax, there could be a raft of bad loans. If they are too tough, they could prompt a credit crunch, with small business owners unable to get loans. That could cast a chill on the entire U.S. economy."

The publication also cited the more than 1,000 protest letters regulators have received from banks, the Independent Community Bankers of America and the American Bankers Association saying that for the most part, "commercial real-estate loan performance is healthy and growth is driven by employment and population growth" and their lending practices have become "far more sophisticated since the last real estate bust in the early 1990s."

At an Office of the Comptroller of the Currency conference in October 2005, John Dugan, comptroller of the currency, said about a third of national banks had commercial real estate loans amounting to 300% or more of their bank capital, the publication said. Dugan urged credit experts at the conference to continue "carefully monitoring banks where these concentrations could become, or already are, significant." Within weeks of the conference, banks started getting letters warning about their commercial lending concentrations.

The article said regulators believe new forces in the market are pushing up real estate prices including bigger banks often selling their commercial loans to be packaged into securities and sold to global investors. "That market is making it easier for banks to come up with money for loans, which in turn boosts demand for commercial property," the article read.

At a New York Bankers Association meeting in April, Dugan pointed out that failed banks in the late 1980s and 1990s had three times the real-estate concentrations of banks that survived. He reiterated that the regulatory agencies' proposal, which would single out those banks that have lent more than 100% of their capital in construction or more than 300% of their capital in commercial real estate generally.

At a June 20 ABA meeting with regulators, some community bank CEOs complained that field examiners are using the measures in the proposal to "beat up" banks with heavy concentrations of commercial real estate loans. --msamaad@cutimes.com

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WSJ Highlights Regulators' Scrutiny of Banks' 'Aggressive' Commercial Lending

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