Fed, IRS try to limit problem loans in commercial real estate
WASHINGTON -- The Federal Reserve is stepping up its scrutiny of commercial real estate loans at smaller banks, which have seen delinquency rates double in the past year.
At the same time, the IRS issued rules Tuesday designed to make it easier to refinance some commercial real estate loans, to try to curb the number of defaults.
Instead of reviewing individual banks, Fed examiners are comparing results across the industry to better assess broader risks, a Fed official said Wednesday. The official spoke on condition of anonymity because of the confidential nature of bank reviews.
Delinquency rates on commercial loans have doubled the past year to 7% as more companies downsize and retailers close, the Fed has said. Small and regional banks face the greatest risk of severe losses from commercial real-estate loans, which are contributing to a rising number of bank failures.
The Fed review is focused on roughly 800 regional and community banks, the official said. The Fed's "stress" tests earlier this year on the 19 biggest banks in the country already examined their commercial real-estate loans.
Unlike the "stress" tests, results of the Fed's examinations of smaller banks are not expected to be made public. The extra scrutiny of commercial real estate loans is being done through the normal supervisory process, the official said.
Based on the government's "stress" tests results in May, Bank of America , Citigroup and Wells Fargo were among the 10 banks told they would have to boost capital by a total of $75 billion to cover potential losses.
Some of the lessons learned from those tests are being applied in examinations of smaller banks, the Fed official said. The biggest change in technique was the importance of analyzing results — risks and problems — industrywide, rather just at the company level.
Credit troubles have spread beyond the risky mortgage-backed securities that were at the heart of the financial turmoil that erupted two years ago and reached a crisis last fall.
