With the one-year anniversary of the legislation authorizing the $700 billion banking system bailout approaching, Congress is gearing up to legislate major regulatory reform, reports Albert Bozzo of CNBC.com in his article, “Financial Reform Package Picking Up Steam in Congress.” The push being spearheaded by House Financial Services Committee Chairman Barney Frank and Senate Banking committee Chairman Chris Dodd. On the House side, the tentative schedule calls for public hearings on the creation of a system regulator, new federal authority over too-big-to-fail institutions, and executive pay limits, followed by markups of bills covering expanded oversight over OTC derivatives, the creation of a consumer financial protection agency, and capital markets regulator reform, according to the article. The House has already approved pay legislation.
One potential hot-button issue is the regulation of banks. Frank and Dodd appear to have differing preferences, according to the article. In September, Dodd outlined a plan to fold four federal agencies ? including the Federal Reserve Bank and the Federal Deposit Insurance Corporation ? into one entity. Frank advocates a plan that would merge the functions of the agencies overseeing banking and savings and loan industries. The Senate will reportedly present a single comprehensive package while the House has scheduled a series of votes on key parts of its reform package.
Where these proposals will play out is anyone’s guess, As one Congressional source familiar with the matter said “Our memory isn’t that long, especially when it comes to passing extreme regulatory reform.” That “lack of memory” appears to be coming at a particularly bad time because more significant problems appear to be lurking on the horizon.
Unfortunately, flashbacks of the residential housing bust may triggered by an emerging commercial real estate bust. Banking regulators at the Federal Reserve are plainly worried that banks with heavy commercial real estate loans are poised to collapse, according to an October 7th article in the Wall Street Journal, “Fed Frets About Commercial Real Estate,” by Lingling Wei and Maurice Tamman.
Banks hold more than $3.4 trillion in outstanding commercial loans, according to the article, and are the second largest loan type after home mortgages. A recent analysis by the Wall Street Journal of bank regulatory filings (more than 800 banks with more than 50% of their loans secured by commercial real estate) revealed that the banks’ loan-loss reserves have fallen drastically since the beginning of 2007 ? from $1.58 for each dollar of bad loans down to just 37 cents for each dollar of bad loans.
Low loan-loss reserves have left banks dangerously vulnerable to the deteriorating commercial real estate market. Vacancy rates in apartments, retail and warehouses have already exceeded those seen in the real estate collapse of the early 1990s. “More pain likely lies ahead for this sector and for those banks with heavy commercial real estate exposures,” said Bill Dudley, President of the Federal Reserve Bank of New York.
The pain has been merely postponed because banks have been slow to recognize losses on their commercial real estate loans, and actually extend bad loans when they come due even though they might not make those loans today. “There’s been an extend-and-pretend philosophy by banks to forestall hits to their balance sheets that might occur,” says Patrick Phillips, new chief executive of the Urban Land Institute. “It’s like taping paper over a hole in the wall,” adds Matthew Anderson, a partner at Foresight Analytics.
If memories and political will have faded, perhaps Fed Chief Bernanke and Treasury Secretary Geitner can do something about it. CNBC.com reports that they plan a “full court press” on Congress this week.
J. Boyd Page, senior partner of Page Perry in Atlanta, noted ” It’s time for Congress to put special interests and differences aside and act to protect the American public.”