Regulatory Statement Offers Good News for Banks with CRE Concentrations

The interagency statement from bank regulators makes clear that guidance is not the same as regulations or laws.

Note to banks with high CRE concentrations and a solid plan to manage them: There’s good news in this week’s interagency statement from prudential banking regulators.  Regulators want you to know that “thresholds are exemplary only and not suggestive of requirements.”

The “clarification” from regulators notes that they are planning to “limit the use of numerical thresholds or other ‘bright-lines’ in describing expectations in supervisory guidance. “ It also makes clear that examiners cannot ding you in an exam for violating guidance.

So what does that mean? In this new anti-regulatory world, regulators want you to read supervisory guidance closely since it often outlines best practices for safety and soundness. But they acknowledge that guidance does not have the force of law, and can’t be used in enforcement actions.

The statement is a clear sign from regulators that they are hearing the repeated grumblings from banks about guidance becoming de facto law. But don’t expect guidance to become insignificant. If you don’t follow guidance that leads to unsafe or unsound practices, examiners will still identify those weaknesses at your bank.

Smart banks should continue to use tools such as stress testing for strategic reasons rather than compliance.   Then you can demonstrate to examiners that your bank can be trusted to operate above thresholds with optimized capital levels as a by-product.  Banks that take such an approach could start to see less examiner nit-picking and resistance for the sake of resistance.  And perhaps the regulatory climate will begin moving toward an innocent-until-proven-guilty environment, rather than the reverse.