Federal bank regulators need to update their commercial real estate (CRE) guidance to bring standards more in line with how examiners treat loans following the financial crisis, according to a new oversight report.
In a report requested by Rep. Barney Frank, D-Mass., the Government Accountability Office (GAO) 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. (FDIC) 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.