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FDIC Federal Register Citations Highland Bank Highland
Bank is pleased to have the opportunity to comment on the proposed guidance on
sound risk management practices for concentrations in commercial real estate
lending. Highland Bankis a
$420 million dollar bank located in St. Paul, Minnesota. Highland Bank wishes
to express its concerns with the proposed guidance and requests that the
regulatory agencies consider whether such guidelines are justified considering
the detrimental impact they will have on the community banking system. Highland Bank appreciates
the fact that community banks are making more commercial real estate loans than
ever before. This is because many types
of loans historically made by banks are now made almost exclusively by other
types of financial institutions. For
example, captive finance companies and realty companies are able to capture
auto loan business and mortgage loan business at the point of sale, making it
difficult for banks to compete, since banks are not allowed to own car
dealerships or real estate brokerages. The Farm Credit System uses government-subsidized dollars to take over
the agricultural loan and rural mortgage loan market. Now with the Horizons Project, Farm Credit
plans to take over the entire rural loan market, including commercial
loans. Credit unions use their tax- and
regulatory-advantaged status to make all types of loans, including commercial
loans, at a lower cost. It is
significant that credit unions are not subject to the proposed guidance, which
is yet another regulatory advance for them. With their opportunities to make loans dwindling, community banks have
focused on commercial real estate loans as an area where they can be
competitive and still make safe and sound loans. It is
interesting that the agencies have chosen to single out commercial real estate
loans as an area of concentrated risk, rather than focusing on other types of
loans that present greater risk, such as commercial loans not secured by
mortgages. Considering the comparatively
low loan-to-value guidelines for commercial real estate, the MBA believes that
commercial real estate loans present a lesser risk of loss than most other
loans. It is also curious that all
types of commercial real estate loans are lumped together as if they all
present the same types of risk when the risk inherent in commercial real estate
loans may vary widely depending on the collateral, the source of repayment, and
other factors. Highland Bank does not believe that all commercial real estate
loans should be lumped together, but if they must be, then regulators should
recognize that they do not create a greater risk of loss than other types of
lending. It is our
position that the vast majority of bankers are well aware of any concentrations
in their portfolio and the risks they may create and that all banks should not
be painted with the same broad brush. Bank owners and management know their communities, their customers, the
value of commercial real estate in their areas and the risks present in their
portfolios. Those few that dont should receive additional regulatory
attention, but it isnt necessary for the agencies to burden the entire
community banking system. It would be
sufficient for the agencies to point out to banks that concentrations exist in
their portfolio and point out the risks inherent in that concentration. One might respond that the guidance is
intended to do just that. However, if
past experience with guidance is any indication, field examiners will expect
complete adherence to all aspects of such guidance, just as if it were a
regulation. And complete adherence in
this case will end up costing community banks a significant amount of time and
money, further impairing their ability to compete. The
regulatory burden that would result from this guidance is significant. Obviously, banks should have systems for
monitoring their portfolios. However,
the guidance goes far beyond what is necessary for most banks to manage their
risks by requiring things such as new policies and procedures, reports on
market conditions, strategic planning, stress testing, sensitivity analyses,
and the list goes on. It seems
incongruous that regulators express concern about the regulatory burden on
community banks, knowing that it is a significant factor in putting community
banks out of business, and then introduce guidance targeted at community banks
that will increase their burden even more. On top of
all the new risk-management techniques community banks will be required to
employ, community banks with perceived concentrations will also be expected to
have an increased level of capital and loan loss reserves. Those two requirements alone will threaten
the survival of community banks by increasing their costs to make loans. How can community banks be expected to
compete in a playing field that was already uneven against credit unions, the
Farm Credit System, and large banks that dont have to comply with such
requirements? Highland Bank asks
the agencies to consider whether the risk of concentrations of commercial loans
secured by mortgages justifies the additional regulatory burden and additional
risks to the viability of the community bank system. We thank you for your consideration. Sincerely, Patrick J. Bradley | ||
Last Updated 03/08/2006 | Regs@fdic.gov |