Regulators Have a Tough Job, Let Them Do It

Trying to keep a lid on loan defaults and bank failures, the FDIC has issued guidance on what it calls prudent commercial real estate loan workouts. Prudent, of course being the key word. As much as 50% of the commercial loans that are scheduled to mature in the next five years are reportedly underwater. Even though the property is no longer worth the loan amount, if it is generating enough income to pay the debt, the FDIC is making allowances for restructuring… as long as  a comprehensive review of the borrower’s financial condition is conducted and passed.

Concurrently, Rep. Barney Frank (D-MA) and Rep. Walt Minnick (D-ID) reportedly sent a letter to bank regulators requesting more leniency in bank examinations (WSJ 11/5/09). They fear that community banks are becoming reluctant to loan at all and that, in turn, will create a bigger credit crunch than we already have.

We have issues with that. That would be like Congress asking BauerFinancial to be more lenient in its star-ratings. Like FDIC chairman Sheila Bair said, and we concur, “if an institution has insufficient capital and then cannot raise new capital, there’s not much we can do about it”.  Regulators and BauerFinancial both provide an important service. Anything that stands in the way of unbiased reviews would negate the process. They want to shoot the messenger.

Sometimes it isn’t pretty, and nobody knows better than Bauer how difficult it can be to explain to a banker that the rating is not in our hands, but in theirs. Barney Frank, et. al. are now finding themselves face to face with some of these same bankers and are being swayed to take action. We say, stick to what you do best and leave bank examinations to the  bank regulators ...especially now that they have something to prove.

One of the banks to prompt Frank’s letter was zero-star Frontier Bank, Everett, WA. It’s a zero-star bank. It lost almost $50 million in the second quarter alone—$82 million for the first half of ’09. Its Bauer’s adjusted capital ratio is (negative 17%)!  Why legislators feels the need to get involved with this is beyond reason. It’s bad enough to publically ignore that all banks are not run equally, but are we now to the point that we actively defend those that are poorly run?

Rep. David Scott (D-GA) also weighed in on the subject. He wants Ms Bair to go easy on his state. As everyone who reads JRN knows, with 114 (35%) of its banks rated 2-stars or below, Georgia has more troubled or problematic banks than any other state in the nation. Are we to blame this phenomena on regulators or on the banks’ own poor underwriting? Maybe Mr. Frank doesn’t understand what is going on in the rest of the country. His state, Massachusetts, only has seven (less than 5%) of its banks on our Problem List. Either way, let’s please just let regulators do their job.