Earlier this year, regulators issued a proposal that calls for banks with a high concentration of commercial real estate loans to take additional steps to manage the risk of these loans. These steps, according to the guidance, could include regular reports on market conditions; detailed tracking of properties, developers and tenants; enhanced underwriting practices; and additional capital.

Federal banking regulators have proposed new guidance for banks with a high concentration of commercial real estate loans. It suggests banks adopt additional risk management measures.  That's not, however, how banks, bank examiners and Wall Street analysts have interpreted the guidance, according to bankers who testified at a House hearing.

Many banks already are changing their lending policies in order to get their share of commercial real estate loans below the thresholds cited in the proposal. About 10 percent of the 270 community banks served by the Independent Bankers' Bank of Florida have capped commercial real estate loans in response to the guidance, says James H. McKillop III, president and CEO of the Lake Mary, Fla.-based bank.

Community banks are concerned that the proposed thresholds will be arbitrarily used by examiners to assess risk: exceed them and the bank is automatically a high-risk institution and should raise more capital.

The proposed guidance includes lots of "shoulds," says F. Weller Meyer, chairman, president and CEO of Acacia Federal Savings Bank in Falls Church, Va., and chairman of America's Community Bankers.

Rep. Spencer Bachus, R-Ala., who chairs the House subcommittee on financial institutions, fears the guidance "may cause banks to shift lending patterns to what the regulator wants instead of what the market dictates."

Regulators "have seen slippage at some banks" in commercial real estate loan underwriting standards over the past two years. Risk management practices, meanwhile, "lag the risks raised by increasing commercial real estate concentrations.

But bankers say these problems should be dealt with on a bank-by-bank basis, not with "one size fits all" thresholds that lump speculative land development deals with multifamily projects that pose little risk.

Different types of commercial real estate operate on different cycles -- and perform differently from market to market -- says Glenn R. Mueller, a University of Denver professor and real estate investment strategist with the Dividend Capital Group.

Dugan says he's heard the concerns about the thresholds "loud and clear," and will make sure bank examiners know they shouldn't be interpreted as caps. Reich, meanwhile, hopes to convince his fellow bank regulators to remove the thresholds from the guidance.

The regulators need to rethink their approach and understand that 2006 is not the same environment as the late 1980s.

Edwina Baniqued