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Banks reduce commercial loan level as federal guidelines tighten | The Commercial Finance Blog

Banks reduce commercial loan level as federal guidelines tighten

by LJ Miehe on August 4, 2009

Denver Post, Colorado – Banks are balking at extending loans to real estate developers because of federal regulatory pressure on financial institutions to contain the volume of their commercial lending.  That’s forcing developers in search of refinancing to default on existing loans and, in turn, give the property to the banks.

The problem stems from federal guidelines issued in 2006 from three bodies — the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Federal Reserve board of governors — that say banks should keep commercial real estate lending to less than 300 percent of their total capital.

To meet that threshold, banks are left with two alternatives in closing the gap: raise equity from private sources or use earnings to write off loans, according to attorney Ernie Panasci of Jones & Keller in Denver, which represents several banks in the the Western United States.

“It’s putting bankers’ head in a vise and in a posture where they basically have an inability to lend,” Panasci said. “The only thing bankers can do is get borrowers to pay off their loans and shrink the bank.”

Colorado ranked 11th nationally in terms of the loans carried as a percentage of capital, according to FDIC records covering the third quarter of 2008.

In its battle to meet the guideline, Bank of Choice last week announced it had raised $15 million in private capital through a common-stock offering. It also boosted its loan-loss reserves by an additional $14 million in the first two quarters to cope with problem loans and declining real estate values.

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