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Banks Quick to Adopt New FDIC Guidelines

November 11, 2009

WSJ is reporting that banks are being quick to adopt new FDIC guidelines which allow them to reclassify the type of debt they have on their books from performing to non-performing by meeting less stringent requirements.

The new policy statement recently issued by the FDIC recently gives banks the ability to restructure loans without hurting the banks standing with the FDIC. The policy statement however really benefits only the strongest developers, which will exacerbate pressure on the weaker ones, which could be argued is the right thing.

The guidelines are controversial, with critics accusing the U.S. government of prolonging the financial crisis by not forcing borrowers and lenders to confront inevitable problems.

Regulators respond that they are being prudent, adding that a crackdown will occur at any banks misinterpreting last month’s announcement as an opportunity for leniency.

“We will push banks to be realistic [about losses] and will drag them out of denial if that’s what we need to do,” Tim Long, senior deputy comptroller at the Office of the Comptroller of the Currency, said in an interview Tuesday.

The banks which are under the most pressure are local and regional banks, who over the past few years got involved in way too many commercial real estate transactions, something which is now backfiring.

More than 2,600 banks and thrifts have commercial real-estate-loan portfolios that exceed 300% of total risk-based capital, according to an analysis of regulatory filings by The Wall Street Journal.

This is the type of statistic that supports previous forecasts that have been made putting expected bank failures in the thousands. It will be interesting to see how many of these banks will be saved by the new guidelines, and also how further declines in the markets will impact loans that perhaps may be reclassified now but fall back into trouble again.

[via WSJ]

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Categories: Commercial Finance and Lending | Commercial Real Estate Investing | Trends
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