More commercial loan oversight?
More than 8,000 small and mid size banks in the U.S. handle the brunt of commercial real estate loans,and the Feds are beginning to think they’ve bitten off more than they can chew. Federal regulators are threatening more oversight in an attempt to prevent another financial meltdown similiar to the one experienced in the late 1980s.
Today, commercial real estate loans account for as much as eight times these institutions’ total risk-based capital in the debt market, the minimum amount of capital needed to support their business operations. That’s a significant amount considering that regulators look twice at loan concentrations amounting to three times a bank’s total capital. There appears to be even greater inherent risks because most of these loans are fueling local construction projects.
According to information provided by the FDIC, commercial real estate loan levels have doubled from about 156% of total risk-based capital in 1993 to 318% in the third quarter of 2006 among commercial and savings banks with assets between $100 million and $1 billion.
While there may be growing concern among many within the industry and among federal regulators, commercial real estate loans have performed well up to this point. Delinquency rates remain extremely low and end up being amongst the lowest rates for the different loans held by banks, according to a senior offical at the Mortgage Bankers Association.