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Balancing act for regulator: How firm to be?

By Stella M. Hopkins
shopkins@charlotteobserver.com

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  • Banks issue reports about their financial health. They also must file detailed reports every quarter with the federal government. You can review this data online at www.fdic.gov and www.ffiec.gov.

    Talk with bankers. What are regulators telling them? How well-capitalized are they?

    There are companies that analyze banks' publicly reported data and calculate ratings of their financial health. Some of those ratings are online, such as bankrate.com. These reports are not based on findings of regulators' exams or ratings, which are not released.



The real estate downturn has North Carolina's top banking regulator asking what's the next moneymaker for banks, even as survival is the immediate goal.

“We are clearly now working with our banks to help them as they work off some excesses in real estate lending,” N.C. Banking Commissioner Joseph Smith said. “The next step is talking with them about the new game plan: What replaces real estate as an income source?”

The housing collapse and deteriorating commercial real estate market have hit most all banks nationwide, ramping up pressure on regulators to help banks manage through the downturn – and avoid a repeat. Their actions reverberate through the economy.

Smith oversees 88 state-chartered banks, which are typically community, midsize and regional banks. They don't include national firms, such as Charlotte's Bank of America. He talked with the Observer last week about what state regulators are doing, the role of bank shareholders, the state of N.C. banking and ongoing challenges.

Questions and answers are edited for clarity and brevity.

Q. Two N.C. banks failed this year, and the commission has more than 20 banks on its troubled list. Do you anticipate a lot more failures?

I'm hopeful there won't be any. I'm hopeful we will have more mergers and acquisitions. I'm getting decent nibbles from private equity (to invest in banks).

Q. How's the health of the state-chartered banks?

They have adequate capital in most cases and more than adequate management to get through the current patch. They need to … realistically look at the value of their assets and have a revised business approach. One, how are they going to deal with the fact that projects that looked great two, three years ago are now worth less. Second, what are they going to do in the future to generate revenue?

Q. What's changed about how banks make money?

There's a tendency with our new banks to rely on development lending in particular. That's given them the ability to grow and compete. That's not going to be the same in the future.

Q. What's your role, as banks face tough times?

We're discussing how not to make a bad situation worse, not being so harsh that we exacerbate things. Our job is to work with banks firmly and fairly, to encourage them to do the things they need to do to get through this mess. We get reports monthly from banks. We're in touch if we see (problems). The intention is to maintain a diverse system of banks that's safe and sound.

Q. What advice would you give to shareholders in N.C. community banks?

They will have to decide whether they're willing to invest more in the bank to get it through the crisis. A number need capital (the cash cushion that enables banks to absorb bad loans). The fate of a lot of community banks around the country depends on whether people are willing to double down and continue to invest and continue to do business with them on terms that allow them to make a profit. There are times when you have to double down to save your investment.

Q. Regulators are among those blamed for the financial crisis. Two N.C. coastal banks failed this year under the weight of real estate loans. What should you have done differently?

We're puzzling ourselves about how to adjust. The problem for regulators is…we always tighten up when things are bad and loosen up when things are good.

Q. What's wrong with telling banks with large real estate portfolios to scale back?

If I step in as the all-knowing, clairvoyant regulator and say ‘Stop the music,' that reduces economic activity. Projects slow down, aren't completed or don't get started. That could lead to slower, more sustainable economic growth. But, at the time (of regulatory intervention), people get bent out of shape so someone like me has to be willing to stand the heat.

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