Texas Regulator Talks about Handling Energy and Real Estate Loan Problems; James Sexton Also Discusses Potential Changes in State, Federal Laws

American Banker, January 23, 1985 | Go to article overview

Texas Regulator Talks about Handling Energy and Real Estate Loan Problems; James Sexton Also Discusses Potential Changes in State, Federal Laws


Q Will 1985 be as tumultuous for Texas banks as the last two years?

A That depends on the economy. If we have a reasonably good economy with low [interest] rates, oil does not take too precipitous a drop, and we have good crops out West, we can have a good year. If any of the variables turn against us, we could have more distress in the banking system in Texas as well as across the nation.

Q Will banks finally begin to enjoy some of the benefits of the economic recovery?

A Banks typically will lag the economic trends. It takes a while for problem credits to come to the top, for the banks to recognize them and absorb them. And regulation also bags banking. It takes a while before we get around and recognize the problems. The losses taken this year were losses that came out of events two to three years ago. That lag effect has already been taken into account.

Q Do you feel confident that the banks have identified and established appropriate reserves for all of their bad energy loans?

A As the energy loans are currently seen, yes. A lot of the rigs have been charged way down and reserves have been taken. If you keep oil in the $28 dollar [a barrel] range, banks are adequately reserved for it. Further developments could require additional reserves. I am told by people who are supposed to know that the banks could cope with a drop in oil prices to the $25 area. A drop below that could be a fairly serious development.

Q Have you taken any preparatory action in this regard, such as asking the banks to increase their reserves?

A No, not in anticipation of it. We can't do that. We have to wait for the events. We call the shots based on what the events are now.

Q Do you share the concern of some analysts and bankers that the boom portion of the real estate cycle is ending and banks may be financing excess space?

A I think it is fairly clear that has already happened in some places around Texas. Houston has quite a bit of empty space. And it does concern me some. There is a lot of expansion going on, and I don't know if all that space can be absorbed.

Q Will Texas banks experience loan problems in their real estate portfolios?

A Ultimately, yes. They will experience some problems, but i hope they have become wiser since the 1973 experience. I think that is true this time. I think they are making loans to people with some equity and not just going into real estate lending without appropriate caution.

Q What type of banks are most vulnerable to real estate loan problems?

A If there is a slowdown, it would affect banks over a broad spectrum. But probably the banks that concentrate in real estate loans would have that magnified. It goes back to the old principle that you diversify or you bear the consequences of a downturn in that industry.

Q Will these problems be as severe as the energy lending crisis of 1983 or 1984?

A That is hard to say. It depends on what happens to interest rates. If rates run sky-high, we could have significant problems. If rates stay at reasonably low levels, then the problems would not be that significant.

Q Is your department taking any action such as stepping up examinations in anticipation of real estate loan problems?

A We are not targeting real estate loan portfolios, but there are some banks about which we are particularly cautious so there is not a need to target real estate in particular. We look at banks that have a great deal of loan growth and attempt to see where that loan growth is. If they are not using sufficient cautions we will encourage them to do so.

Q The two largest bank credit card operations are leaving the state because of Texas' usury laws and restrictions that prohibit service fees. Should the Texas Legislature abolish these restrictions?

A I have never particularly believed in usury ceilings. …

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