To the Editor:
The American Banker of April 20 includes a viewpoint from former FDIC chairman Bill Seidman [For Their Own Protection, Banks Should Be Kept Out of Real Estate, page 17] arguing that the Federal Reserve and Treasury should not permit banks to engage in real estate brokerage. The argument is flawed in several respects.
Before elaborating further, I should note that we have not been retained by clients to advise or comment on the pending real estate rule. As always, the views in this memo are my own, not a paid advertisement.
As to the substance of Mr. Seidmans column, lets turn first to the argument that banks would engage in real estate agency powers. Consistent with the Fed and Treasury authority under the Gramm-Leach-Bliley Act, all they are proposing is to allow a financial holding company, or FHC, to engage in real estate brokerage.
This activity can only be conducted in a bank if a bank regulator approves it under applicable banking law. When conducted in an FHC, real estate agency operations will be under common control with that of a bank, but the activity will like securities or insurance underwriting be separated from it by extensive firewalls. The same will be true if real estate brokerage is conducted in a national bank financial subsidiary, again consistent with the Acts framework.
Second, real estate agency services arent, as Mr. Seidman suggests, analogous to the commercial investments involved in the Asian debacle. I would argue that the biggest problem in Japan, Korea, and Thailand is not banks cross-shareholdings in commercial firms but rather that accounting, capital, and reserve standards were (and mostly still are) so lax that losses are only recognized when they become too cataclysmic to ignore.
In this respect, Asian commercial investments were treated no differently than the billions in bad Asian loans that went unrecognized for years and were a far more important cause of the banking problem than cross-shareholding.
Mr. Seidman suggests that handling the sale of a building is the same as selling it, making agency activities commerce. This is, one supposes, a theological argument, but we think that brokering a sale without a beneficial interest in it is a lot different than being the buyer or seller. The banking agencies have so far sided with us, allowing banks and FHCs to be finders in a wide range of transactions that do not differ from real estate brokerage in any discernible respect.
Mr. Seidman also says that bank-affiliated realtors would tie sales. Maybe, but this would be illegal under the Real Estate Settlement Procedures Act. Moreover, the proposed regulations go one step farther, prohibiting FHCs or financial subsidiaries from conditioning credit or its terms on the use of an affiliated broker and imposing arms-length terms on interaffiliate transactions. Any realtor associated with a mortgage lender would be covered by all the conflict of interest standards that are backed up by very substantial fines under current law.
Finally, to the real issue: Would real estate agency threaten the solvency of banks or more accurately, the banks associated with FHCs? Mr. Seidman says it could because of the taint of commerce. We dont see that problem, so perhaps we miss his point.
However, we do think that adding fee-based revenue lines to FHCs diversifies their income stream away from traditional on-balance-sheet risks. By doing so banks in FHCs are strengthened, and the FHC is too.
Karen Shaw Petrou
Federal Financial Analytics