WASHINGTON -- Banks with highly concentrated levels ofcommercial real estate loans in their portfolios, will be subjectto scrutiny under final guidelines released Dec. 6 by industryregulators.

The guidelines were jointly issued by the Office of theComptroller of the Currency, the Board of Governors of the FederalReserve System, and the Federal Deposit Insurance Corp. and setsforth sound risk management practices that an institution shouldemploy when it has CRE concentration risk, according to theregulators. Credit concentrations are broadly defined as groups orclasses of credit exposures that share common risk characteristicsor sensitivities to economic, financial, or business developments.The agencies said they would use certain criteria to identifyinstitutions that are potentially exposed to significant CREconcentration risk. Criteria include institutions that haveexperienced rapid growth in CRE lending, have notable exposure to aspecific type of CRE, or are approaching or exceed the followingsupervisory criteria may be identified for further supervisoryanalysis to assess the nature and risk posed by the concentration:total reported loans for construction, land development, and otherland loans represent 100% or more of the institution's totalrisk-based capital; or if total commercial real estate loans,represent 300% or more of the institution's total risk-basedcapital. If the outstanding balance of the institution's commercialreal estate loan portfolio has increased by 50% or more during theprior 36 months, the agencies will also take a look at lendingactivity.

The regulators issued proposed guidelines in January in largepart because of the increased concentrations in CRE, especiallyamong small to midsized banks. The regulators were concerned thatrising CRE loan concentrations "may expose institutions tounanticipated earnings and capital volatility in the event ofadverse changes in commercial real estate markets."

Since then, there have been some revisions to the guidelineswith the final model emphasizing the guidance does not limit banks'CRE lending, but rather guides institutions in developing riskmanagement practices and levels of capital that are commensuratewith the level and nature of their commercial real estateconcentrations, the regulators said. The guidelines also focus oncommercial real estate loans that are dependent upon the cash flowfrom real estate held as collateral and sensitive to conditions inthe commercial real estate market.

The Independent Community Bankers of America has said theguidelines could be "detrimental" to communities in the longrun.

"Whether the guidance will be detrimental or not depends on howexaminers apply it and how community banks react to the guidance,"said Karen Thomas, ICBA executive vice president and director ofgovernment relations. "If it causes community banks to pull backunnecessarily from sound commercial real estate lending activities,it would harm the nation's economy--the opposite of what theguidance attempts to achieve."

The banking trade group said it would have preferred that"regulators simply rely on existing standards which have proven tobe effective in steering banks through weak commercial real estatemarkets."

CUNA, which typically doesn't comment on proposed bankingregulations, has previously said the guidelines are "a common senseapproach to protect the safety and soundness of the bankingsystem." CUNA specifically pointed to the bank and savings and loancrisis in the 1980's and early '90s as "the most notorious" exampleof how lax supervision by federal banking regulators has cost theeconomy hundreds of billions of dollars in taxpayer funds for abailout of troubled banks and thrifts," said CUNA President/CEO DanMica in an April 14 comment letter. The guidelines do not impactcredit unions.

Meanwhile, bank regulators have continued to clarify that theguidance is not intended to apply to loans where commercial realestate collateral is taken as a secondary source of repayment orthrough an abundance of caution and that numerical screeningcriteria will be used as a supervisory monitoring tool to focussupervisory resources on institutions that may have significantcommercial real estate loan concentration risk. A loan growthscreen has been added to identify institutions with both highcommercial real estate concentrations and recent rapid increases inthese portfolios, the regulators added.

The Office of Thrift Supervision issued guidelines, but did notinclude any specific thresholds. The American Bankers Associationhas told banks to follow OTS guidelines. [email protected]