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PCBB Banc Investment Daily May 16, 2017
Banc Investment Daily
May 16, 2017

Measuring Regulatory Relief

Researchers at New York University and Michigan State University have reportedly figured out a way to easily fool fingerprints digitally by creating artificial master prints that can open up smartphones up to 65% of the time. These master keys if you will are a spooky concept because they demonstrate how bad guys might also break into biometric safeguards that are being used more and more by banks. It just goes to show that for every countermeasure there seems to be a new workaround that quickly follows in this technological world around us all.
Speaking of measures, in the banking industry the FDIC has been taking action around commercial real estate (CRE). We recently discussed the FDIC Supervisory Insights publication, which expressed concern over the high level of CRE loan balance sheet volume.
In a hefty 430-page report issued jointly by the FFIEC, on Mar 21st, regulators proposed government officials allow banks to increase the threshold for CRE appraisals from $250k to $400k. The hope is that a directive to gather further information may eventually even lead to raising the threshold to $1mm for real estate-secured business loans.
The report went on to state that regulators are seeking to amend current rules so that community banks do not have to use a blunt capital weighting of 150% but, instead could use a "more straightforward treatment" for certain loans based on acquisition, development and construction lending. Further, the report suggests simplifying the capital requirements for mortgage servicing assets, timed difference deferred tax assets and other capital instruments issues by financial firms.
Further good news from this report comes as a regulatory recommendation is made to simplify and streamline the rural property appraisal process, which already has a regulatory committee permitting temporary waivers for appraisals in rural areas under certain conditions.
Besides raising the threshold for commercial appraisals, making capital weighting more clear-cut and simplifying rural appraisals, the report also recommended other changes. These included streamlining call reports and making bank examinations less frequent for more financial institutions.
While this would all clearly benefit community banks, some pundits are urging a careful review before changing any of the existing guidelines. Even the OCC has stated that credit risk has been one of the biggest issues for regulators in Matters Requiring Attention (MRAs) at community banks over the past year. They are concerned that expanded loan growth could be partially due to a loosening of underwriting practices at some banks.
For its part, the Appraisal Institute believes that it would be prudent to keep the current guidelines, largely due to CRE market condition worries. Although community banks have strengthened lending practices since the last recession, any signs of a softening CRE market could increase concerns for some.
The industry has clearly become more diligent in lending practices over the past several years and that is generally a good thing. As regulators consider loosening some of the tight constraints, especially for community banks, we are definitely happy and so are many bankers. Unfortunately, any such loosening of restrictions and rules is never a slam dunk, so only time will tell. As such, we will be sure to keep you updated on these measures to improve the biometrics of the regulatory fabric, as things progress along.