FDIC Federal Register Citations

Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429

Dear Mr. Feldman:

As a community banker, I appreciate the opportunity to comment on the
proposed guidance entitled Concentrations in Commercial Real Estate
Lending, Sound Risk Management Practices (Guidance). While I understand
that the federal regulatory agencies have expressed concern with the high
concentrations of commercial real estate loans at some institutions, I
believe the proposed guidance will have a serious impact on community
banks and local economies in general.

Commercial real estate (CRE) lending has been an important business line
for my institution and many other banks in Massachusetts. Community banks
play an essential role in creating local economic growth by providing
credit to small and medium-sized businesses for construction and land
development. The proposed guidance will place a significant regulatory
burden on banks that have a market niche in commercial real estate loans,
limiting the institution’s future growth in this area and possibly forcing
some banks out of the market altogether.

I am particularly concerned with the “one-size-fits-all” nature of the
proposed guidance. Institutions are automatically classified as having a
“CRE concentration” simply if they exceed the thresholds. Portfolio
diversification or other risk mitigation procedures are not taken into
consideration. Because real estate markets vary greatly from region to
region, and even within a particular state, the agencies should focus more
attention on local market conditions and the overall condition of the
individual institution than generic thresholds broadly applied to all
banks.

The guidance encourages institutions to adopt a series of the proposed
risk management principles if a CRE concentration exists. While many
banks may have some of these procedures in place, others will be
cost-prohibitive for community banks. For instance, there are few
effective stress tests available to smaller institutions. If institutions
are unable to adopt these principles, some may leave the CRE market
altogether. This will disproportionately affect urban areas, since the
guidance exempts many of the loans made in rural areas from the threshold
calculations. Many times, community banks are the only source of credit
available to small business owners in these distressed areas. Forcing
banks to reduce or abandon CRE lending in these neighborhoods could
inhibit revitalization efforts and leave business owners with no choice
but to turn to more expensive forms of credit.

In addition, the guidance recommends increased capital levels for banks
with CRE concentrations. This requirement will place a serious burden on
mutual institutions, which represent 70 percent of the banks in
Massachusetts and who rely on earnings as their sole source of new
capital. Therefore, these institutions would be forced to reduce levels
of a strong earning asset in commercial real estate during a period of
significantly reduced margins.

Finally, the proposed guidance comes at a time when the agencies are also
proposing changes to the capital system through the Basel I-A process.
Both proposals could have a significant impact on community banks, and I
encourage the agencies to better coordinate their efforts in this area.

Thank you again for the opportunity to comment on the proposed guidance
and for considering my views.

Sincerely,