From
The Motley Fool “It is widely agreed that the real estate bubble and subsequent financial crisis was, at its root, a problem of banks making loans that couldn't be paid back.
Banks flooded the market with easy money for commercial real estate, or CRE, and acquisition, development, and construction, or ADC, projects; those projects created a dramatic oversupply fueled by speculation; and then the house of cards fell apart in 2008.
Let's dig into the data and see how they industry has corrected itself and then look at two specific banks that are still operating with ADC and CRE loans levels well in excess of regulatory guidelines.
What is an appropriate level of ADC and CRE?
Regulators generally encourage banks to maintain a ratio of 100% or less for total ADC loans to risk weighted capital and 300% or less for commercial real estate loans to risk weighted capital.
These levels are not written in stone, though. They are guidelines, not laws. If a bank wants to exceed these guidelines, it can. However, regulators expect those banks to have far superior processes and underwriting policies to manage the elevated level of risk.
According to a recent report from the bank data website
BankRegData, 78% of banks with an ADC to risk weighted capital of 400% or more in the first quarter of 2008 have by today either failed or been acquired. Sixty-nine percent of banks with CRE levels at 600% of capital failed or were acquired.
Only about 15% of banks within the regulatory guideline 100% or less have failed or been acquired.”
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