Why No Lending? Bankers vs Regulators

The Ft Worth Business Press has an article today titled "Bankers Bristle at Regulatory Stance on CRE Loans". No really big revelations here...Bankers complain that the 2006 Interagency Guidance on Concentrations in CRE is hampering lending due to treating real estate as a risker asset class without regard to how an individual loan might be underwritten (e.g. loan on new development with lots of competing product and high vacancy vs. a 50% LTV performing loan with strong secondary sources of repayment). Developers complain that no financing is available, so no growth can occur.

What is interesting in this article however, aside from the economic observations so blinding brilliant in their obviousness, is the following:

"But, regulators themselves are in a difficult situation because during the last few years many have been criticized for being too lenient and allowing risky loans to go through, and those same regulators today are being criticized for being too strict, said Scott MacDonald, president of Southern Methodist University’s Southwestern Graduate School of Banking.

We’re in less-than-stellar economic times,” MacDonald said. “And during that period of time the regulator’s job, which is being handed down all the way from Washington, is to make sure financial institutions are operating in a safe and sound manner. Are they having higher expectations of them? Yes. Is that appropriate? It may well be. With the concern about risk out there, how can you turn around and say that these higher expectations are not necessarily prudent? I’m not going to pick on anybody here, banks or regulators. I believe there’s too much uncertainty out there.”

The regulatory framework is absolutely backwards. It is during times of high growth and 'easy money' that the regulators should have the highest expectations placed upon them to insure that they are monitoring the safety and soundness of financial institution lending and that they should in turn place the greatest demands on institution management to demonstrate that solid risk management practices are in place.

As it is today, the regulators and institution management are mending fences and closing gates on corals that the horses left long ago.