Fed: Real Estate Development under Op-Sub Rule Too Risky

Article excerpt

The Federal Reserve Board has warned the Office of the Comptroller of the Currency that allowing national banks to develop real estate could cause a financial debacle akin to the 1980s thrift crisis.

In a comment letter this week, the Fed urged the OCC to reject an application by NationsBank to enter the real estate development business through a direct operating subsidiary.

The power to develop property would be "incompatible with sound banking" and could expose banks to "greater potential losses," Fed Secretary William W. Wiles wrote.

"Approval would take national banks down a road that Congress has historically barred and that could very well lead to serious financial consequences for the banking system and ultimately the taxpayer," Mr. Wiles said.

The thrift crisis testifies to the "imprudence" of mixing banking and real estate development, according to the letter. "The board believes that it would be unwise to risk repeating this experience with the national banking system."

Besides the Fed, the National Association of Realtors and dozens of Realtors from Arizona to Florida flooded the OCC with letters of opposition.

The Fed and the realtors similarly argued that financial institutions that lack the necessary expertise have suffered huge losses in real estate ventures. Expanded powers would put national banks in competition with their borrowers and could create conflicts of interest, they added.

Banks with development subsidiaries could deny loans to a competitor, misuse proprietary information on competitors who apply for loans, or favor projects that complement their subsidiaries, opponents said.

"This is opening the door too far for the banking business," wrote realtor Lynn Waller of Cadiz, Ky.

The Fed's response was the latest volley in an ongoing turf battle with the Comptroller's Office. While the Fed wants new activities to be housed in holding company units, the OCC contends banks should be able to offer new products and services directly.

In March, the lead bank of Charlotte, N.C.-based NationsBank Corp. asked the OCC for permission to develop property and to finance real estate leasing through direct operating subsidiaries. …