Excessive concentrations of commercial real estate loans have produced huge losses at banks and regulators need to set "hard limits" on CRE portfolios, according to Comptroller of the Currency John Dugan.

The federal banking regulator issued CRE concentration guidance on banks and thrifts in 2006 over the objections of the industry. The comptroller acknowledged his guidance has "obviously not worked" as well as he would have liked, considering the huge number of bank failures stemming from CRE loans — in particular construction and development notes.

The 2006 guidance advised banks and thrifts that C&D loan portfolios exceeding 100% of equity capital would be considered a "high concentration" by examiners. Regulators should consider a range of options, including harder limits, Dugan told the Independent Community Bankers of America.

In addition, regulators might weigh increased capital requirements, minimum underwriting standards and a more granular approach to defining concentrations based on CRE loan type. He noted that newly-chartered banks are over-represented among the 195 bank failures in the past 24 months.

"I also think we should consider the issue of minimum federal standards for all newly chartered depository institutions, with a particular focus on business plans that call for significant CRE concentrations or reliance on non-core deposits for extended periods," he said.

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