FDIC Federal Register Citations

From: Roger E. Marcorelle [mailto:rmarcorelle@comcast.net]

Sent: Monday, March 06, 2006 4:45 PM

To: Comments

Subject: FDIC 2006-01, OCC Docket No. 06-01, Federal Reserve Docket No. OP-1248, OTS No. 2006-1

Roger E. Marcorelle

171 Jersey Street

Marblehead, MA 01945-1346

March 6, 2006

Robert E. Feldman

Executive Secretary

Federal Deposit Insurance Corporation

550 17th Street, NW

Washington, DC 20429

Dear Mr. Feldman:

As a community banker, I appreciate the opportunity to comment on the

proposed guidance entitled Concentrations in Commercial Real Estate

Lending, Sound Risk Management Practices (Guidance). While I understand

that the federal regulatory agencies have expressed concern with the high

concentrations of commercial real estate loans at some institutions, I

believe the proposed guidance will have a serious impact on community

banks and local economies in general.

Commercial real estate (CRE) lending has been an important business line

for my institution and many other banks in Massachusetts. Community banks

play an essential role in creating local economic growth by providing

credit to small and medium-sized businesses for construction and land

development. The proposed guidance will place a significant regulatory

burden on banks that have a market niche in commercial real estate loans,

limiting the institution’s future growth in this area and possibly forcing

some banks out of the market altogether. Commercial real estate loans as

the regulators view them also includes construction loans for housing,

which in Massachusetts already has a supply and demand imbalance for new

houses causing an ever increasing burden for creating affordable housing.

I am particularly concerned with the “one-size-fits-all” nature of the

proposed guidance. Institutions are automatically classified as having a

“CRE concentration” simply if they exceed the thresholds. Portfolio

diversification or other risk mitigation procedures are not taken into

consideration. Because real estate markets vary greatly from region to

region, and even within a particular state, the agencies should focus more

attention on local market conditions and the overall condition of the

individual institution than generic thresholds broadly applied to all

banks.

The guidance encourages institutions to adopt a series of the proposed

risk management principles if a CRE concentration exists. While many

banks may have some of these procedures in place, others will be

cost-prohibitive for community banks. For instance, there are few

effective stress tests available to smaller institutions. If institutions

are unable to adopt these principles, some may leave the CRE market

altogether. This will disproportionately affect urban areas, since the

guidance exempts many of the loans made in rural areas from the threshold

calculations. Many times, community banks are the only source of credit

available to small business owners in these distressed areas. Forcing

banks to reduce or abandon CRE lending in these neighborhoods could

inhibit revitalization efforts and leave business owners with no choice

but to turn to more expensive forms of credit.

In addition, the guidance recommends increased capital levels for banks

with CRE concentrations. This requirement will place a serious burden on

mutual institutions, which represent 70 percent of the banks in

Massachusetts and who rely on earnings as their sole source of new

capital. Therefore, these institutions would be forced to reduce levels

of a strong earning asset in commercial real estate during a period of

significantly reduced margins.

Finally, the proposed guidance comes at a time when the agencies are also

proposing changes to the capital system through the Basel I-A process.

Both proposals could have a significant impact on community banks, and I

encourage the agencies to better coordinate their efforts in this area.

Thank you again for the opportunity to comment on the proposed guidance

and for considering my views.

Sincerely,

Roger E. Marcorelle