New Commercial Real Estate Accounting Rules: Cooking The Books

New guidelines for examining commercial real estate loans issued by the FDIC appear to allow examiners to go easy on banks as they account for what would be, under many circumstances, considered non-performing commercial real estate loans. This may help banks with their balance sheets and solvency, but it also misleads bank investors and the public about the seriousness of the huge problem in the commercial real estate lending business.

The new FDIC directive says “Financial institutions that implement prudent CRE (commercial real estate) loan workout arrangements after performing a comprehensive review of a borrower’s financial condition will not be subject to criticism for engaging in these efforts even if the restructured loans have weaknesses that result in adverse credit classification.”

That could be read as saying the examiners should be tolerant of banks that have significant commercial real estate exposure in the form of bad loans. It gives examiners an “out” to not pressure the firms to take write offs, if they are working hard with a commercial real estate borrower. What “working hard” may be is left open to interpretation.

The action is a ham-handed effort to allow the wave of  failing commercial real estate loans, which are likely to never return to their face values, to be seen as having some intrinsic value because banks are trying to restructure them. All that does is distort and hide the seriousness of the problem. It is a problem that is likely to ruin a number of banks. Putting it off does not alter its threat to the banking system.

Douglas A. McIntyre