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FDIC Federal Register Citations FAIRFIELD COUNTY BANK CORP. March 13, 2006 FAIRFIELD COUNTY BANK CORP. March 10, 2006 Mr. Robert Feldman Re: Proposed Guidance on Commercial Dear Mr. Feldman: We agree with the comments that remind institutions that the BOD and Senior Management have a responsibility for implementing procedures and controls necessary to comply with operating a bank in a safe and sound manner. Further, we agree that we have the responsibility to ensure these policies and procedures provide for adequate identification, measurement, monitoring and controlling the lending risk within it’s’ portfolio. Past banking crisis have been clearly documented and written about by your agency. A pre-cursor and contributor to some of the major crisis has been “stroke of the pen” risk which can be traced back as far as the elimination of Reg Q. The deregulation of the financial markets created an environment where non insured financial intermediaries were allowed to usurp lending and deposit products that were traditionally the domain of insured banks. Clearly, the most recent crisis of the eighties and early nineties provided for significant new regulations, elevated examination guidelines and guidance on real estate lending. These included underwriting, appraisal, environmental, oversight, analysis, loan loss reserves, risk ratings, LTV’s, capital levels, reporting and clearly defined the roles of management and the board in the area of managing risk. To better understand changes that have occurred, one needs only to review the FDIC’s manual of Examination Policies where in your own words you state in the CRE section: “these loans comprise a major portion of many banks’ loan portfolios when problems exist in the real estate markets that the bank is servicing, it is necessary for examiners to devote additional time to the review and evaluation of loans in these markets”. The manual continues to provide examiners guidance on how adverse economic developments and/or overbuilt markets can cause real estate projects and loans to become troubled. There is also specific guidance on real estate construction loans, unsecured front money, land development loans, commercial mortgage and commercial and residential construction loans. The manual also addresses concentrations: “Generally a concentration is a significantly large volume of economically-related assets that an institution has advanced or committed to one person, entity or affiliated groups. These assets may in the aggregate present a substantial risk to the safety & soundness of the institution. Adequate diversification of risk allows the institution to avoid the risks imposed by concentrations. It should also be recognized, however, that factors such as location and economic environment of the area limit some institutions ability to diversify.” The proposed guidance merely restates much of the guidance already in existence. An arbitrary test does not account for the differences in risks taken by money center, major regional and community banks. Certainly there is a difference in construction loans which finance major commercial real estate on a non recourse basis and single family construction in a bank’s local market. There is also a big difference in financing owner occupied small business, smaller retail, local investors who invest in non-class A real estate, local residential construction versus the extremely large single and market exposures that larger banks assume when lending to Reit’s, big box retailers such as Home Depot, the hotel and resort industry and a host of other large commercial spec financing . You do not take into account differences in property type, DSCR, LTV, guaranteed or non-recourse, smaller multifamily (6-family) versus very large rental complexes (100 plus units). Your own guidance to examiners provides that: The examiners evaluation of the loan portfolio involves much more than merely appraising the individual loans. Prudent management and administration of the overall loan account, including establishment of sound lending and collection policies, are of vital importance…” Your examiners have tangibly demonstrated this by raising concerns regarding concentrations that fail to meet your proposed tests wherein a resultant risk for any concentration is better determined based on an independent analysis of the institution, its’ policies, controls, underwriting practices, management experience, portfolio makeup, reporting and informational flow. As relates to the definition of CRE, again, we believe that your existing examination guidelines provide banks and examiners an understanding on how to recognize risks where general types of loans fall within the category of poor risk selection. We believe the proposed guidance is unnecessary & could simply create a threshold that is not properly evaluated as to risk under all existing policies, procedures and guidelines already in place. It could cause, without intention, some financial institutions in limited markets to seek diversification into much riskier and higher yielding assets either directly or via participations which could in the aggregate pose more risk than CRE lending such as the fast growing market in sub-prime auto and home equity lending and hybrid type consumer loans such as neg ams and option arms. In closing, an arbitrary test is inappropriate given all the tools and guidance already available to management of financial institutions in order to operate in a safe and sound manner and to regulators regarding the examination of banks. Respectfully submitted: Charles Balocca | |
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Last Updated 03/15/2006 | Regs@fdic.gov |
