- The Washington Times - Tuesday, October 24, 2006

Federal banking regulators are developing guidelines that would establish a new threshold for determining whether banks have assumed too much risk with their commercial real estate loans.

Community bankers in the Washington area are worried the guidelines will restrict commercial real estate lending and hurt their businesses.

The banks, which rely heavily on commercial real estate loans to generate business, say they could be forced to change their mix of investments, which could reduce their earnings by cutting into their most profitable market.

“It could diminish the value of the bank to their shareholders,” said Martha Foulon-Tonat, chief loan officer for Bethesda’s EagleBank, which operates nine branches in Washington and Maryland suburbs.

Roughly 60 percent of the bank’s loans are in commercial real estate.

The Federal Deposit Insurance Corp. (FDIC), the Federal Reserve, the Office of Thrift Supervision and other banking agencies are preparing a final version of the guidelines. No publication date has been set.

Members of Congress and about 1,500 bankers, who filed written responses with FDIC, said the rules would too strictly confine loan decisions.

“If community banks are pressured to lower their [commercial real estate] exposures, their ability to generate income and more capital will be constrained and they will lose good loans to larger competitors,” said the Independent Community Bankers of America, a trade group for community banks.

FDIC officials downplay the risk to banks, saying the guidelines would be more of a reminder about the risks of commercial real estate loans than a regulatory burden.

Bank examiners who analyze the finances of banks would use the guidelines as one measurement in deciding whether to take regulatory action against them, but the guidelines would not be enforced as an absolute rule, according to FDIC.

“The lending in this area has been on a fairly high growth pattern,” said Steve Fritts, FDIC associate director. “Any time we see a high rate of growth, we want to make sure the banks are properly managing that growth.”

He agreed that community banks would be affected the most.

“Most commercial real estate lending is small-business lending,” Mr. Fritts said. “That is quite often their primary business base.”

Community banks are those that operate within a single region and whose local managers control all business decisions.

A draft version of the FDIC guidelines proposed in January would classify a bank whose commercial real estate loans equaled at least 300 percent of its capital as “concentrated.”

The community bankers group said the 300 percent threshold for commercial loans forces a single measurement system on them that might be inappropriate for banks that already manage their investments and other assets well.

A. Bruce Cleveland, president of Presidential Bank in Bethesda, said many community banks have few alternatives to commercial real estate loans.

“If a significant portion of the community banking industry is to reduce its concentration of commercial real estate loans, then where is it to redeploy those assets?” Mr. Cleveland asked.

Other loans, such as home mortgages, provide too little income “to support the overhead of a community bank,” he said.

Some bankers said they would need to be more restrictive about which borrowers qualify for loans.

“I don’t believe we want to create the unintended consequence of reducing small businesses’ access to credit,” said Mike Menzies, president of Easton Bank and Trust, a community bank in Easton, Md.

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