Financial Regulatory Forum

U.S. FDIC’s Bair urges banks to take losses on commercial loans

By Reuters Staff
January 20, 2010

By Karey Wutkowski

WASHINGTON, Jan 20 (Reuters) – A top regulator on Wednesday told banks to stop dragging their feet and recognize losses on commercial real estate loans, a sector that is due to deteriorate in the coming quarters and drive bank failures.

Sheila Bair, chairman of the Federal Deposit Insurance Corp, said banks should try to modify troubled commercial real estate (CRE) loans, but must recognize losses if such a workout does not maximize value.

“The losses need to be recognized,” Bair stressed to a conference of the Commercial Mortgage Securities Association.

Bair, an activist regulator, has been hailed for her early warnings on the dangers of subprime lending and securitizations.

She said on Wednesday that she expects the rates of noncurrent CRE loans to continue to rise “in the coming quarters,” and reiterated her belief that the troubles in the sector will increasingly be a driver of bank failures this year.

Bair said failed banks with high concentrations of CRE may be difficult to sell as a whole bank, meaning the FDIC may save more institutions through securitizations.

“The CRE loans are highly distressed and a lot of bank acquirers just may not want them, so I think you will see more securitizations this year,” she said.

Last year 140 U.S. banks were seized by regulators, the highest annual level since 1992 in the wake of the savings and loan crisis.

The FDIC has said it expects bank failures to peak this year, but that depends on the overall economic recovery.

The woes in the banking industry have migrated from home mortgages to CRE, especially for community banks that tend to have higher concentrations of commercial loans.

Bair said on Wednesday that problems on the commercial side started later than in the residential markets, but in some respects have been more pronounced.

Declines in CRE prices have been larger on average, Bair said, with price indices down by more than 40 percent from their 2007 peak.

“Of course, the ultimate scale of losses in CRE loan portfolios depends on the pace of recovery in the U.S. economy and financial markets,” Bair said. “On this point we remain hopeful.” (Reporting by Karey Wutkowski; Editing Bernard Orr) ((E-mail:karey.wutkowski@thomsonreuters.com +1 202 898 8374))

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