WASHINGTON — Federal bank regulators need to update their commercial real estate guidance to bring standards more in line with how examiners treat loans following the crisis, an oversight report said Thursday.
In a report requested by Rep. Barney Frank, D-Mass., the Government Accountability Office said the agencies are mostly following a 2006 interagency guidance meant to limit CRE concentrations. But in certain cases, examiners' actions are inconsistent with those guidelines.
The inconsistencies, the GAO said, could result from a tougher approach among examiners in the strict regulatory environment following the crisis, as well as differences of opinion among regulators about whether the 2006 guidance is adequate.
"Given these findings, and in light of lessons learned from the recent financial crisis and CRE market downturn, the regulators could reassess the adequacy of the guidance," the GAO said. "Revising or supplementing the guidance to provide more details about risk management practices and examples of when to reduce CRE concentrations would help both examiners and bankers better understand how to assess and manage such concentrations."
Generally, officials with the Federal Deposit Insurance Corp. thought the 2006 guidance — which focuses attention on banks with CRE loans totaling 300% of their capital — worked for its examiners, the report said. The FDIC had supplemented the guidance for its banks in 2008, issuing a financial-institution letter about how the tumultuous environment at the time should affect treatment of CRE lending.
Similarly, the Federal Reserve Board found the 2006 guidance sufficient, but cited ongoing efforts to clarify how banks should stress-test or measure capital for their portfolios. But the OCC, the GAO said, said more extensive changes were warranted.
"In contrast, OCC has been reviewing whether particular capital requirements should be set for banks that have higher CRE concentrations and stated that this could lead to changes in OCC or interagency guidance," the report said.
Frank, the ranking Democrat on the House Financial Services Committee, called for the report in response to concerns from banks that examiners have been overly strict in treatment of CRE loans following the crisis.
Yet while it found examples of examiners departing from the guidance, the GAO suggested the guidelines should be tougher, not lighter.
"Prior to the financial crisis, regulators' efforts included guidance on CRE concentrations and risk management, but these efforts were not as robust as they could have been in addressing CRE risks," the report said.
The 2006 guidance, issued when regulators were concerned some community banks were relying too heavily on the still-booming CRE market, carried restrictions not only for portfolios meeting the 300% threshold, but also when a bank's CRE loans increased by 50% in a prior 36-month period and when a bank's acquisition development loans were 100% of its capital. The regulators followed the guidance in 2009 with guidelines on CRE workouts.
Among a sample of 55 examination reports, the GAO found examiners were "generally consistent with policy guidance." But there were also inconsistencies. For example, in seven exams - one conducted by the Fed, three by the OCC and three by the FDIC - the examiner ordered banks to reduce CRE concentrations. "The basis for this requirement was unclear or appeared inconsistent with the 2006 CRE concentration guidance," the GAO said.
In the conclusions section, the report said: "While we and the regulators have reviewed examiner application of the CRE guidance and generally found examiners' actions were accurate or well-supported, some inaccuracies and inconsistencies were evident — particularly relating to the 2006 guidance."
In addition to enhancing the interagency guidance, the GAO also recommended that the agencies ensure that it is applied consistently.
Just as the agencies demonstrated differences of opinion about the adequacy of the guidance, they also responded to the GAO report somewhat differently. Both the Fed and the OCC agreed with the need for a joint regulatory update.
"The OCC believes there may be a need to provide more clear and explicit expectations that as concentrations increase, so must the level and robustness of risk management systems, stress testing, capital planning and capital levels," Acting Comptroller of the Currency John Walsh said in an April 28 letter to the GAO, which was included in the report.
But the FDIC reiterated its support for the step it already took in 2008 to clarify how the guidance should be applied during periods of stress. In a May 10 letter, Sandra Thompson, director of the agency's risk management supervision division, said, "The FDIC has implemented additional supervisory strategies that we believe supplement the existing guidance."
