Banks Seek Relaxed Rules to Handle Real Estate Loans

By Skidmore, Dave | THE JOURNAL RECORD, June 8, 1990 | Go to article overview

Banks Seek Relaxed Rules to Handle Real Estate Loans


Skidmore, Dave, THE JOURNAL RECORD


WASHINGTON - Commercial bankers beset with souring real estate loans are seeking the same type of regulatory leniency that analysts say pushed savings and loan institutions deeper in trouble.

Meeting in private at a Washington hotel, chief executives of some of the nation's largest banks asked the Federal Reserve Board to bend capital standards while they work off losses from sour real estate loans, according to minutes of the session obtained by The .

The 12-member Federal Advisory Council, created by law to advise the central bank, suggested at the May 3 meeting that regulators permit banks to deduct real estate loan losses from their earnings over a period of years rather than all at once.

It also asked for relaxed capital rules to permit banks to hold and manage repossessed real estate rather than have to sell it into a depressed market.

``It would be constructive to include a more flexible approach to problem real estate assets,'' the minutes said.

Analysts denounced the suggestion, pointing out that forbearance by S&L regulators allowed those institutions to disguise their true condition and run up their losses.

``It's deja vu all over again,'' said Robert Litan of the Brookings Institution, a Washington think tank. ``This was the story of the 1980s and the thrift crisis.''

Ber Ely, a financial institutions consultant in Alexandria, Va., said forbearance toward agricultural lenders during the farm crisis of the early 1980s worked out but was a gamble.

``Every time you do it, you're taking a risk with the taxpayers' money. The problem is if it isn't done well, we end up in another S&L mess,'' Ely said.

Spreading out losses over a period of years improves the appearance of a bank's balance sheet, Ely said: ``But the thing is the losses are there and the earning power of the bank is impaired as a result. ... Ultimately it's a charade.''

Litan said extended loss write-offs allow banks to continue to pay dividends to stockholders. But he added, ``Personally I don't think that's prudent. When capital weakens, they should husband every dollar of earnings they have and plow it back into the bank. …

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