On Nov. 7, the four principal banking regulators issued a joint policy statement on the classification and review of commercial real estate loans.

The statement, which followed a more general set of guidelines issued in March, is a declaration of principles relating to the review of loans by the authorities. It cites the factors that examiners are expected to use in their evaluations.

Guiding Principals

The significance of the November statement lies less in what it says than in the fact that the four principal regulatory agencies - the Federal Reserve, the Federal Deposit Insurance Corp., the Comptroller of the Currency, and the Office of Thrift Supervision - have now spelled out what they collectively regard as guiding principles.

There was a widespread impression that the different agencies were decidedly less than unanimous on regulatory matters.

Even more distressing had been the occasional lack of written agency guidelines upon which managers might be able to base their discussions.

That the four regulators are now taking action together thus appears to represent a significant step forward.

Reasonable Assessments

As pointed out by Treasury Secretary Nicholas Brady and others at this week's meeting of examiners in Baltimore, the November statement was intended to encourage examiners to use reasonable, realistic assumptions about commercial real estate in their examinations of financial institutions.

Such decisions are still, as they ought to be, matters of judgment.

Examiners are to assess loans based on such factors as local economic conditions, the examiner's confidence in how much a manager knows about his borrower, and how complete the documentation is of the loan or project.

Management decisions about what discount rates to use in values on real estate have been frequently overruled by examiners (although subject to review and appeal to higher authority).

Whether a loan is to be classified as either substandard or doubtful is often a close call.

Anecdotal evidence suggests that in a number of cases the past harshness of examiner assumptions has produced such a drastic downgrading of loan portfolios that lenders, well aware of the need to conserve capital, have shut off the lending pipeline.

This, in turn, has contributed to the credit crunch.

At least a part of the credit availability problem seems to stem from the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and the political climate in which that law was hastily drafted.

Congress was, and still is, sore at the financial services industry for creating a problem of gigantic proportions.

But this problem is alo a product of the consumer and real estate recession, the federal deficit, the Tax Reform Act of 1986 (which reduced the attractiveness of income property ownership), legislative ineptitude (in deregulating the S&L industry in the early 1980s, while cutting back on funds for supervision), and an increase in the insurance of accounts from $40,000 to $100,000.

Yet these contributory factors get overlooked.

The need for coordination of regulation is long overdue and the November interagency policy statement is a move in the right direction.

Mr. Peltz is vice president of the financial institutions advisory division of Nationar, a New York-based consulting and data processing firm.

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