USA Today had an article in May about the risks of commercial loans to banks. Why post it now? I’ve noticed a proliferation of high yielding CDs at various banks. Even Mission Federal Credit Union which has been the lowest paying bank for years, is now paying 5.4% APY. Last month I asked a supervisor if they could match the World Savings CD rate, and they could not; they were at least 1% lower. Since last week, they are matching the other banks. Why? Are they beefing up reserves in anticipation of the new Federal Reserve, OTC, and FDIC guidelines?
Commercial real estate has surged after several down years. ..This is worrying federal officials, who note many banks are carrying a heavier concentration of real estate loans today than they did during a heady 1980s boom — a boom that ended in a bust, forcing many lenders out of business.
In Georgia, commercial real estate loan concentration (a definition that includes housing activity) is at record levels, soaring from $7.5 billion and 40% of bank assets in 1996 to $34.5 billion and 61% in 2005, the Federal Deposit Insurance Corp. says. In Florida, construction and development loans grew 66% in 2005. In Wisconsin, 87% of lenders boosted commercial real estate portfolios in the past year.
Nationally, in the mid-’90s, 15%-20% of federally insured banks had what regulators consider a heavy load of commercial real estate loans. In 2005, it was 40%, the FDIC says.
“For banks in the moderate-sized ranges and smaller, what we’re seeing is that the amount of capital committed to commercial real estate has basically more than doubled from the year 2000 and that … these loans today represent three times capital,” says Federal Reserve Gov. Susan Schmidt Bies, a former bank official. “Back in the worst times of the ’80s, it was one-and-a-half times capital.”
Capital generally refers to bank equity, loan loss reserves and certain forms of debt.
Determined to avoid a reprise of the 1980s, regulators are tightening standards for commercial real estate lending. While such loans are generally performing well and bank profits are healthy, Bies and other officials warn that the industry is entering a time in which problems are most likely to crop up. Interest rates are rising and a wave of just-completed office, condo and other buildings are coming to market, which could affect rents and prices.
Based on the potential risk, banks would be expected to have appropriate controls such as clear risk standards, oversight by their bank board, strategic and contingency planning for downturns, and adequate capital and reserves.
AM Best notes that more than 60% of banks in California had lending concentrations above the 300% threshold, some with commercial loans at more than 1,000% of capital.
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