New FDIC rules on real estate write-offs are very liberal -- for banks

The FDIC released new guidelines to bank examiners on Oct. 30, and they present a more "liberal" view of what is and is not a nonperforming commercial real estate loan. In theory, the regulations could reduce the number of bank write-offs.

The guidelines say that "while CRE [commercial real estate] borrowers may experience deterioration in their financial condition, many continue to be creditworthy customers who have the willingness and capacity to repay their debts. In such cases, financial institutions and borrowers may find it mutually beneficial to work constructively together."

The Wall Street Journal writes that a study by Foresight Analytics finds that "About $770 billion of the $1.4 trillion commercial mortgages that will mature in the next five years are currently underwater."

The change in how the current regulations should be interpreted appears to be a fudging of the way in which federal agencies look at bank financial statements. Loans that are "nonperforming" may be restructured, but many are likely to lose a great deal of their value in the process. The FDIC appears simply to be dealing with losses that would be incurred in the normal course of business by pushing the true accounting for them into the future.

It is to the political benefit of Washington to make it appear that the banking sector is getting better. It also probably helps the FDIC, which is essentially insolvent, from having to come up with billions of dollars to insure deposits at failing banks.

In the meantime, the next wave of real trouble in the financial industry is being partially swept under the rug.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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