C'mon! Give the Regulators a Break!

Much is being written in the press about the regulators, especially the FDIC, allowing banks to “extend and pretend” because of the October 30, 2009 “Policy Statement on Prudent Commercial Real Estate Loan Workouts.” Comments in online articles and blogs state, “Bank examiners have guidelines to follow when they review bank’s books, but none of the guidelines forces banks to ultimately resolve problem loans”
and, “Rather than foreclose, banks were guided to extend and amend loans.”

While the Youtube video on CRE posted below is hilarious, it accuses the FDIC of amnesty during bank examinations and I don’t see this being the case in any way.



The guidance that was released is simply a reiteration of policies that have been in effect for many years. Assistant examiners are taught these policies during training classes at the FDIC’s training facility in Virginia and while on the job from more seasoned examiners. The same is true for the other regulators. For lenders who have lived and worked through the last banking crisis, this is not new material. For bankers who have worked in this industry for shorter time periods, some of this material may be an education. During the conference call on December 3, 2009, Darrin Benhart, Director of Commercial Credit at the Office of the Controller of the Currency, stated, “I want to emphasize that there's no change to the definition or the process for analyzing credit in determining the classification.” The transcript for the call can be found at
http://www.fdic.gov/news/news/financial/2009/fil09068.html.

What the guidance does do is clarify the aspects of a loan credit that an examiner evaluates while reading the loan during an onsite examination. The guidance also discusses in detail the benefits of restructuring a note using an A and B note structure. In reality, many of a bank’s borrowers want to remain in good standing with their bank, especially if they have long-term established relationships with their community bankers. By restructuring a loan into two notes, the bank has the ability to structure the A note according to their institution’s board approved lending policy and eventually return this note to accrual status without an adverse classification. This scenario benefits everyone. The B note is typically charged off but the bank has the opportunity to recover if the situation presents itself.

By following this methodology, a bank will take a loss, but the loss will not be as severe. In my opinion this is not the regulators' way of saying not to recognize the loss, but a better way to estimate the actual loss. If this can be accomplished while banks are starting to realize increased earnings, more banks can be saved and the customer/banker relationship can be maintained. More importantly, the property will not have to be foreclosed upon, thus avoiding additional legal expenses for the bank and stemming the flow of distressed real estate in the market.

It is in no one’s best interest to have as many failures as the last banking crisis. During that crisis, the Resolution Trust Corporation was created in 1989 to facilitate the sale and disposition of bad assets, mostly consisting of real estate and securities, from failed thrifts. The RTC dealt with 747 thrifts with assets totaling over $394 billion. The assets were sold for cents on the dollar to investors. If they could make good on the loans, they were rewarded handsomely. Former FDIC Chairman William Isaac estimated that some funds who were organized by Wall Street investment banks earned annual returns of 40-50% on their investments.

While the ultimate cost to the taxpayer was not quite as large as originally estimated, the loss in the banking industry was huge. Efforts to contain this crisis and return the banking system to health is well worth the effort.