CRE loans continue to drain banks of the earnings they so desperately need to maintain an adequate capital base. Community banks in particular are faced with the toughest challenge because lending to small businesses are what they do best. “These loans comprised over 43 percent of community bank portfolios and the average ratio of CRE loans to total capital was above 280 percent” as stated by FDIC Chairman Sheila Bair before a Senate Subcommittee on October 14, 2009.
The federal regulators are advocating very strongly that banks work themselves out of these troubled assets as quickly as possible. It’s in a bank’s best interest to rid themselves of these troubled assets and move towards investing in assets that will return the bank’s core earnings to a positive stance.
To aid in this process the federal banking
regulators will soon issue CRE Loan Workout Guidance. This document is reportedly long,
approximately 28 pages, but well written and containing specific examples to assist bankers in this process. When a loan goes bad and is eventually written off a bank’s books it will hopefully be a lesson learned. However, the loans that remain on the books will be thoroughly scrutinized during the examination process. A bank can get to better know their credits by employing dynamic stress testing exercises. This knowledge will serve to support your loan loss reserve allocations, your internal loan review risk ratings, and ultimately protect your capital base.
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