Faulty Appraisals Kill Banks - Bank Think Article - American Banker

If you read through enough material loss reviews prepared by the FDIC's Inspector General — essentially autopsies on failed banks — certain common themes emerge. One of the recurring themes is that many closed banks overconcentrated in commercial real estate and development loans. The rapid decline in property values, reflected by appraisals, then rendered the bank undercapitalized.

Banks often tell the story of a downward spiral in the carrying value of their property loan portfolios as examiners require updated appraisals followed by a series of re-appraisals. In most cases, these dwindling values involve GAAP accounting and valuation definitions (market value versus fair or liquidation value) and appraisal assumptions.

Regulators fostered this confusion by not regularly updating interagency appraisal guidance. Between 1994 and December 2010, the respective regulators failed to update interagency appraisal guidance once.

Why is this point so pivotal to banks? Each downward revision and additional loan loss provision tightens the noose as loan value markdowns whittle away the bank's capital position.

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