Real estate development is a big business in Colorado, but tighter federal restrictions on commercial real estate loans could put a damper on that market, bankers say.
Regulators are concerned that many banks, especially small and mid-size banks, are too concentrated in commercial real estate and construction loans, leaving them vulnerable in a downturn.
“We know from the painful experience of just 20 years ago that commercial real estate lending has the potential to fail banks,” John Dugan, comptroller of the currency, testified last week at a House Finance subcommittee hearing on the topic.
Regulators are expected to require tighter supervision of banks that have leveraged their capital to lend more than 100 percent of it in construction or more than 300 percent in commercial real estate.
Bankers in Colorado and elsewhere fear that any new restrictions could take away a key market for them.
“We are concerned that with all this additional scrutiny and unnecessary busywork, banks will be a little less likely to make these loans,” said Chuck Johnston, president of North Valley Bank in Thornton.
Businesses would find it harder to get the money they need to fuel future growth, he warned.
The economic model for many independent banks specializing in real estate lending could also change if stricter limits are passed.
“A number of community banks intend to sell,” said Barbara Walker, executive director of the Independent Bankers of Colorado. “They say they can’t be profitable, they can’t do their business.”
As a group, Colorado-based banks carried commercial real estate loans at 255 percent of their capital in the first quarter, according to the Federal Deposit Insurance Corp. Nationally, commercial real estate loans were around 195 percent of capital.
Many community banks in the state carry higher concentrations. Castle Rock Bank has commercial real estate loans above 350 percent of its capital, while a few banks are at 700 percent or more.
“We have to effectively manage any concentration,” said T.J. Tedesco, Castle Rock Bank’s president and a former regulator.
His bank and others are looking more closely at their real estate lending, which is a good thing, he said.
But community banks in growth areas such as Colorado are going to have higher levels of commercial real estate loans, he added.
Bankers argue that examiners should keep the focus on the quality of the individual loans being made and allow for regional differences.
They have shot off more than a thousand letters to regulators, and several people from Colorado have thrown themselves into the fray.
University of Denver professor Glenn Mueller testified last week before the House Finance subcommittee that commercial real estate markets have become more transparent over the past 20 years and less prone to overbuilding.
“This increased transparency allows investors, developers and lenders to react much more quickly to market risk,” he said in prepared testimony.
Don Childears, chief executive of the Colorado Bankers Association, met last week with FDIC chairwoman Sheila Bair and Federal Reserve governor Susan Bies and left hopeful that bankers would receive guidelines they could live with.
“They understand that we read it to say things that they didn’t intend it to say,” he said. “We feel that we are going to get a better kind of guidance from the regulators on real estate.”
There is no set date by which regulators hope to impose new standards on bank loans.
Staff writer Aldo Svaldi can be reached at 303-954-1410 or asvaldi@denverpost.com.
