 Marcie Geffner |
Commercial real estate development is neither an appropriate nor a necessary business activity for the nation's banking institutions. Yet federal regulators have allowed two major banks to invest in such projects, despite the considerable inherent risks and the troubling historical precedent of the savings-and-loan crisis, in which hundreds of financial institutions failed largely as a result of unwise real estate developments. These regulators should be compelled to reverse their erroneous decisions and not allow these banks to go forward with these activities.
The Office of the Comptroller of the Currency, an arm of the Bush administration that regulates federally chartered banks, has given Bank of America and PNC Financial Services Group permission to invest in two major real estate development projects that they contend are part and parcel of their banking business activities.
PNC will invest $122 million in a mixed-use project near its headquarters in Pittsburgh, Pa., that will include a 30-story office building, a 150-room hotel and 32 condominiums, the later of which will be sold to make the project pencil out. The bank also expects to tap public financing and tax incentives to make the project work, according to a local newspaper report.
Bank of America plans to develop and own a 15-story, 150-room luxury hotel as part of its headquarters complex in Charlotte, N.C. The bank expects to utilize approximately 37 percent of the hotel rooms for its own business-related guest stays each year.
Banks are permitted to engage in real estate development projects that are necessary to accommodate the needs of their banking businesses. However, as the National Association of Realtors contended in a letter to U.S. Treasury Secretary John W. Snow, these projects expand the scope of national banks' development activities in a manner that seems inconsistent with a number of existing federal banking laws and regulations.
The OCC's decision to permit a couple of banks to build in their own backyards and, to some extent, for their own needs, might seem innocuous. But these activities aren't truly necessary for these banks and since the necessity is questionable, there's no sound reason for OCC to start down this path. Since two banks today could become dozens of banks tomorrow it would be better for the OCC to draw a hard line against such activities now rather than risk the possibility of potentially costly consequences later.
It was only 17 years ago that Congress was forced to create the Resolution Trust Corp., which sold off the assets, primarily real estate, of some 750 savings-and-loan associations that had overextended themselves into risky investments. During its seven-year lifespan from 1989 until 1995, the agency cost taxpayers $116 billion, according to one FDIC study. It's not unreasonable to suggest that a rebirth of the Resolution Trust Corp. could be cards if the OCC and the banks continue along this proverbial slippery slope.
As NAR correctly argued to Snow: "The OCC's course of action poses a significant threat to the safety and soundness of the entire banking system, financial markets and the U.S. economy. The savings-and-loan scandal of the 1980s and the sluggish Japanese economy, where banks are intertwined with real estate and commercial enterprises, are dramatic examples of the negative consequences of mixing banking and commerce. We do not want to repeat past mistakes, and we should learn from the mistakes of others."
The association's argument may be less sound, however, when it comes to the OCC's decision to allow Union Bank of California to own 70 percent of a wind energy project, an investment NAR has cited as another instance of a banking institution's involvement in real estate development. Yet the bank, perhaps rightly, contends that this activity is not a real estate development, but rather an investment to generate federal tax credits. NAR's effectiveness as an advocate may be diluted by the inclusion of this project, which seems not to fit the argument.
Further, NAR is perhaps not the ideal challenger to set against the banks on this issue since the Realtors association has fought a longstanding grudge match against the banks over their desire to compete directly with NAR's members in the real estate brokerage business. Yet a biased challenger is far better than no challenger at all, and NAR is to be commended for its pursuit of the matter thus far. Regardless of one's position on the question of whether banks should be permitted to enter the real estate brokerage business, the idea of banks going into real estate developments such as those that Bank of America and PNC have announced should cause considerable alarm. The Realtors group rightly points out that such activities "increase banks' exposure to risk and threaten the safety and soundness" of the banking system.
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