Washington - The Federal Deposit Insurance Corp. asked the industry Tuesday to comment on two proposed alternatives for curbing the size of property loans that banks can make.
Separately, the agency disclosed the capital guidelines it plans to use in dividing banks into five categories. Banks in the weaker categories will face operating limits and the possibility of being closed.
Both sets of proposals were required by the banking law adopted last December and contained few surprises. The industry has 45 days to comment on them. The law requires the real estate lending curbs to take effect by next March and the capital categories by this December.
The real estate limits, which specify the maximum amount a bank can lend as a percentage of a property's appraised value, figure to be more controversial.
Congress gave regulators some leeway in establishing the so-called loan-to-value ratios, and two weeks ago Deputy Treasury Secretary John Robson warned that overly restrictive guidelines could undermine the economic recovery by curbing banks' ability to lend.
The FDIC proposed maximum lending ratios for six types of loans: raw land, preconstruction development, construction and land development, improved property, one-to-four-family residential property, and home equity. The ratio is defined as the total amount of credit extended as a percentage of the appraised value of the property.
If the lender does not have a first lien, then all senior liens would be added to the amount of the loan when figuring the ratio, the FDIC said.
Under one proposed alternative, the agency would set a range of maximum ratios for the categories, with each bank being able to choose its own maximum from the range.
A Flat Figure Suggested
Under the other proposal, the FDIC would set a flat maximum ratio in each category for the industry.
In some cases, the maximum ratios under the first proposal would be slightly higher than in the second proposal. For example, the maximum loan-to-value ratio on construction and land development loans would be 65% to 80% under the second one. (See graphic on page 1 for complete listing.)
The FDIC said it recognizes "that situations may exist where it is considered prudent to extend credit beyond specified [loan-to-value] ratio limits." Therefore it plans to allow banks to make real estate loans that do not conform with the ratios, up to 15% of capital.
Of the two choices, banks would obviously prefer to set their own ceiling, said Kevin J. McCullagh, a senior vice president of Mellon Bank who is vice chairman of the American Bankers Association's housing and real estate committee.
He said regulators should be wary of putting banks at a competitive disadvantage against insurance companies, real estate investment trusts, and lenders not subject to the rules. But he added that any disadvantage would be "marginal" in the short run because most banks are already pulling back from realty lending.
A spokesman for the National Realty committee, a lobbying group for developers, expressed concern that the rules could make it harder for borrowers to roll over and restructure a large amount of real estate loans coming due in the next few days. "It's important that the flexibility exist for lenders to be able to renew or restructure them properly," said the spokesman, Cary Brazeman.
Break for Strong Banks
The FDIC asked for comments on whether its real estate lending standard's should go beyond loan-to-value ratios. The agency suggested the adoption of limits on lending concentration or loan maturity.
Timothy Ryan, director of the Office of Thrift Supervision, who is a member of the FDIC board, sponsored an amendment to the plan that would exempt well-capitalized, well-managed banks from the lending standards. This option is being put out for comment, although FDIC Chairman William Taylor said: "It's like asking people if they like candy."
Some real-estate related loans will be excluded from the new standards, including:
* Loans guaranteed or issued by the U.S. government or on its behalf.
* Those that facilitate the sale of real estate acquired by an institution through foreclosure.
* Loans renewed, refinanced, or restructured by the original lender to the same borrower, as long as no new funds are advanced.
A Way to Get Tougher
The FDIC's proposed capital categories will let regulators clamp down harder and harder as a bank's capital falls. The categories are based on the definitions of capital used by the FDIC's recent rule limiting brokered deposits.
There are five categories of capital, ranging from well-capitalized to critically undercapitalized. (See accompanying chart.)
Most banks - 11,933 with $3.5 trillion of the industry's assets - would be considered either "well-capitalized," or "adequately capitalized," and would escape the rule's worst penalties.
But 79 banks with $27 billion in assets would be deemed "critically undercapitalized" under this plan because their leverage ratios are 2% or less. That means tangible equity makes up less than 2% of the bank's total assets.
Seizure Is a Prospect
These banks could be seized by the government under the rule, although the FDIC could decide to give the bank up to nine months to recover.
Another 56 banks with $13 billion in assets would be classified as "significantly undercapitalized" because their capital is less than 6% of risk-based assets, their Tier 1 capital is less than 3%, or their leverage ratio falls below 3%. These banks could not be seized, but their operation would be strictly controlled by regulators.
A bank will be considered "undercapitalized" when when its risk-based ratio falls below 8%, its Tier 1 capital is less than 4%, or its leverage ratio sinks below 4%. As of March 31, there were 190 banks with $190 billion in assets that would be classified as undercapitalized under this rule.
All banks in the undercapitalized categories would be required to submit improvement plans within 45 days of slipping below capital minimums. Their growth would be restricted, as would such things as opening new branches or entering new lines of business.
Significantly undercapitalized banks could be subject to additional restrictions, such as caps on deposit rates, limits on transactions with affiliates, and orders to sell subsidiaries or fire executives.
Regulators also could require these banks to oust their boards of directors and elect new members.