CoStar - Don't blame the current wave of bank failures on commercial real estate; much of the blame belongs to bad bankers. While it is clear that commercial real estate and construction and land development loans have figured in most every bank failure in the last couple of years, it is also becoming evident that bad bank management and, in some cases, outright deceit, were at the core of many of the banks' problems. In addition, more regulatory supervision may have mitigated some of those problems, according federal bank failure audits. The Federal Deposit Insurance Act requires the Federal Deposit Insurance Corp.'s (FDIC) Office of Inspector General (OIG) to conduct a material loss review of individual bank failures. A review of the seven material loss reviews completed and released this summer by the OIG show common themes.
Many failed banks' boards and managers did not implement adequate controls to identify, measure, monitor and control the risks associated with significant and growing CRE loan concentrations; Many failed banks exhibited weak internal controls and questionable credit underwriting standards; and They financed growth in lending through potentially volatile non-core liabilities such as higher-priced certificates of deposit, including brokered deposits. In the seven audits, the OIG also pinpointed instances of insufficient federal oversight. In general, the audits suggested that the FDIC, while good at following required supervisory procedure, could have done more. For example the audits suggested the FDIC should have: Placed greater supervisory emphasis on more forward-looking assessments; Taken a more aggressive supervisory approach where risky loan concentrations were growing rapidly; Issued more critical assessments when banks were not adhering to original business plans; and Taken further steps to ensure that management and internal controls were commensurate with the business strategy.
