Federal Reserve Governor Daniel K. Tarullo has warned that community banks are facing a significant challenge brought about by the weakening of the commercial real estate (CRE) market. Speaking before the Federal Reserve Bank of New York Community Bankers' conference, Tarullo stated that the sector will need to realign its approach to the CRE market.
‘The first order of business for many will be to address concentrations and weaknesses in CRE lending activities,’ Tarullo said. ‘This will require not only rethinking credit administration practices and management information system requirements, but also expanding loan workout expertise and disposing of acquired real estate with a minimum of additional loss. This last task could be complicated by the large volume of commercial properties expected to come onto the market as a result of failures of other banks that concentrated their lending in the commercial real estate sector.’
Tarullo added that loan writedowns and loan provisioning will require a higher level attention, while an increase in the number of updates of appraisals or evaluations would be necessary to support impairment analyses.
‘Coping with CRE problems will not be easy,’ he continued. ‘I expect these problems to be with us for some time to come, with both direct and indirect consequences for many smaller banks.’
Tarullo noted that the Federal Reserve and other financial regulatory agencies have worked to address the problem through the fall 2009 issuance of guidance that defines the restructuring and workout of commercial real estate loans. However, he urged community banks to be vocal if they feel the guidance is impairing their operations.
‘Our guidance is not an invitation to lend and pretend,’ he said. ‘It is a commitment that Federal Reserve supervisors will not take a mechanical or reflexive approach to your management of CRE exposures that are, or soon could be, problems. If you believe that we are not implementing the terms of this guidance, please let us know and give us the details. Only with such detailed information can our senior supervisory officials at the Federal Reserve Board determine if our implementation is, in fact, promoting the policies set forth in last fall's guidance.’
SOURCE: Federal Reserve System