Commercial banks that got too involved in residential and commercial construction lending during the housing boom were responsible for 80% of the losses the Federal Deposit Insurance Corp. suffered from 2007 and 2011, according to a new study.
The joint study by the Office of the Comptroller of the Currency and Federal Reserve Board looked at banks that exceeded the 2006 supervisory guidance on construction and commercial real estate lending.
The guidance warned banks to be careful if their land acquisition, development and construction loans represented 100% or more of their risk-based capital.
“Construction lending was a key driver of many failures,” the joint study says. “Thirteen percent of banks that exceeded only the 100% construction criterion failed.”
The 2006 supervisory guidance also warned that ADC and CRE loans combined should not exceed 300% of capital.
Among banks that exceeded both the construction and CRE lending limits, 23% failed during the three-year economic downturn from 2008 to 2011, compared with 0.5% of banks for which neither of the criteria was exceeded, the regulators said.
During the downturn, the percentage of banks that exceeded the 100% capital line on
