Monday, October 19, 2009

Bloomberg: FDIC Failed to Limit CRE Loans

by Bill McBride on 10/19/2009 09:55:00 AM

Bloomberg reviewed 23 recent Inspector General reports of bank failures and concluded that the FDIC "failed to enforce its own guidelines to rein in excessive commercial real estate lending" (CRE).

From Bloomberg: FDIC Failed to Limit Commercial Real-Estate Loans, Reports Show (hts Mike in Long Island, Ron at WallStreetPit)

... The FDIC’s Office of Inspector General analyzed 23 lenders taken over by regulators from August 2008 to March and found that for 20, the agency’s examiners didn’t identify the issue early enough or should have taken stronger supervisory action after recognizing the banks had dangerously high levels of the loans before they failed. ...

“It’s often we’ll see in our reports that the FDIC detected problems in the bank in a timely fashion, but in some cases forceful corrective action wasn’t required by the FDIC to be taken quickly enough,” Jon Rymer, the FDIC’s inspector general, said in a telephone interview.
This is recurring theme. The examiners in the field, for both the FDIC and the Fed, recognized problems fairly early, but the agencies failed to take aggressive action.

Here are two related posts: Inspector General: FDIC saw risks at IndyMac in 2002 and Federal Reserve Oversight and the Failure of Riverside Bank of the Gulf Coast

The from a state regulator:
“We should have been more strict,” Joseph Smith, North Carolina’s bank commissioner and chairman of the Conference of State Bank Supervisors, said in a telephone interview. ...

Had we required the reduction of CRE lending, it would have been thought of as an intrusion by regulators into the businesses of banks and to the operations of local economies,” Smith said. “Yes, it would have been the right thing to do. It would have caused a firestorm then. That might have been better than a firestorm now.”
I believe the regulators should have clamped down on CRE lending in 2006 - and the FDIC was aware of the problem. Here is a proposed interagency guidance on CRE lending from January 13, 2006.
Concentrations of CRE loans may expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in the general commercial real estate market. ... The proposed guidance reinforces existing guidelines for real estate lending and provides criteria for identifying institutions with CRE loan concentrations that may warrant greater supervisory scrutiny.
The final comments from Joseph Smith provide a clue as to the real problem. The examiners in the field were finding the problems, but the regulators were failing to act because "it would cause a firestorm" and it would be "thought of as an intrusion by regulators".

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