How regulators are making a bad situation worse


Late last month, Gulf Shores Mayor Robert Craft and Herb Malone, head of the Alabama Gulf Coast Convention and Visitors Bureau, testified before committees of the U.S. Congress about the effects of the BP oil spill on coastal Baldwin County.

Craft testified before the House Financial Services Committee, directing much of his testimony at issues that have arisen between local banks and bank regulators in the wake of the spill. The regulators’ actions, he said, have resulted in constricting the availability of bank credit for coastal businesses at a time when virtually all of these businesses are scrambling to survive because the spill drove away tourists — and tourists’ dollars — just at the time of year that ordinarily generates their highest levels of revenues.

In his testimony before the Subcommittee on Commerce, Trade and Consumer Protection, Malone cited a study conducted for the Alabama Department of Tourism, which found that in 2009 tourism generated some $2.3 billion in direct spending in Baldwin County.

He testified that he expects the coast this year to lose half or more of the “high-season” spending — a loss of between $850 million and $1 billion.

Unfortunately, some of the actions being taken by bank regulatory authorities are needlessly exacerbating an already difficult situation and putting the region and its financial infrastructure at further risk.

The banking agencies need to give serious consideration to providing temporary relief in three areas:

Easing agency-imposed requirements that banks must obtain current valuations of real property located in areas affected by the spill.

Postponing for 18 months any requirement by regulators that a bank affected by the spill must raise new capital.

Providing affected banks an extended period for amortization of loan losses incurred since the spill.

Among the most immediate effects of the oil spill has been a virtual paralysis of real estate markets in coastal areas. The Press-Register reported a study last month by a Gulf Shores real estate firm that showed that the dollar volume of property sales in Orange Beach, Gulf Shores and Fort Morgan in May and June of this year was more than 36 percent below the level of sales in the same two months in 2009.

Once the crisis passes, as is expected in the coming months, the market should rebound. As noted by Mayor Craft in his testimony, this is the position taken by Kenneth R. Feinberg, administrator of the BP claims fund, who has said that he expects that losses in property values generally will not be compensated because they will be only temporary.

The reliability of current property appraisals conducted in the present environment on the coast is open to serious question, yet regulators continue to require bankers to obtain a current appraisal of property in coastal areas whenever the most recent appraisal on file is more than a year old.

Such appraisals are required for banks’ “other real estate” (which generally includes properties acquired through foreclosure or in settlement of debt), and of some of the properties that secure outstanding bank loans when regulators consider such property to be located in a “distressed” area.

If a current appraisal shows a decline in the value of “other real estate,” the bank is required to charge that decline against its earnings, which also reduces its capital. If an appraisal shows that the value of property that secures a loan has declined, the effect is less certain because other factors will come into play.

If, however, the regulators conclude that the decline means the loan no longer is adequately secured, then, unless the borrower can provide additional collateral, the bank probably will be required to increase its loan-loss reserve, again reducing its earnings and capital.

Rather than imposing such harsh results on banks as a result of temporary declines in property values, regulators should consider declaring an 18-month moratorium, until the current spill-affected market stabilizes, on requiring write-downs in the value of “other real estate” solely as a result of a current appraisal.

In addition, the agencies should direct their examiners that, if current valuations of property held as collateral are to be used for any purpose, the present circumstances of coastal real estate markets should be carefully weighed and considered in determining what use properly should be made of such valuations.

Just as real estate markets on the coast have experienced disruptions because of the spill, the capital markets for businesses in coastal areas also have virtually closed, as investors have made it clear that they will not be prepared to commit funds to enterprises in coastal areas until the impact of the spill is better understood.

In such an environment, capital-raising efforts by banks in coastal regions — those headquartered in any county within 100 miles of the Gulf, and those that receive 25 percent or more of their deposits from such counties — are unlikely to succeed.

Regulators accordingly should postpone, for 18 months, the effective dates of any deadlines previously imposed on any such bank for raising new capital, except in the case of a bank deemed “systemically significant.” And the agencies should refrain, for 18 months, from requiring such banks to engage in new capital-raising activities.

Lastly, coastal banks are facing increased loan losses as a direct result of the oil spill.

A quarter of a century ago, when the nation’s agricultural sector was experiencing a crisis that had drastic effects on many banks serving agricultural customers, Congress acted to provide relief to ease banks’ agricultural losses.

A provision in the Competitive Equality Banking Act of 1987 allowed qualified agricultural banks to amortize losses incurred on agricultural loans, in any year from 1984 through 1991, over a period of up to seven years, so long as there was no evidence that the loss resulted from fraud or criminal abuse by the bank.

Members of Congress representing coastal areas of Alabama, Florida, Louisiana, Mississippi and Texas attended a meeting last month in Washington with senior officials of the federal bank regulatory agencies, which was convened by House Financial Services Committee Chairman Barney Frank, D-Mass., and Ranking Member Spencer Bachus, R-Ala. The purpose was to discuss potential means of providing relief to banks affected by the oil spill.

Several of the Congress members at the meeting reportedly are considering steps to provide banks in coastal areas temporary relief, possibly including an extended period for amortization of loan losses incurred in the period following the spill.

The objective of the measures proposed above is to allow the banks that operate on the Gulf Coast some time, and perhaps some breathing room, to cope with the current financial stresses.

That also could include giving banks time to absorb the losses that inevitably will follow, while maintaining their ability to provide financing to creditworthy businesses and borrowers who will need to have credit available in order to survive now, and to recover and restore their ability to regenerate the tourist economy in 2011.

Add comment

Stuart H. Smith is an attorney based in New Orleans fighting major oil companies and other polluters.
Cooper Law Firm

Follow Us

© Stuart H Smith, LLC
Share This