RICHMOND, VA-As the latest news from the Treasury Department makes clear, US financial institutions are still struggling with the after-effects of the real estate crash and deep recession. For the most part, the largest money banks have regained their equilibrium and in fact are posting profits. Second and third tier institutions, however, are not nearly in such good standing.

The bad news is that regulators are stepping up their scrutiny of all banks, healthy or not, to make sure their exposure to commercial real estate is within strict guidelines. The good news is that it appears they are willing to take a flexible approach. At least five local institutions have agreed to a memorandum of understanding with the FDIC and the Virginia Bureau of Financial Institutions, the latest being Midlothian, VA-based Village Bank, according to Richmond Biz Sense.

Village Bank has been posting profits, and according to news accounts, is a healthy operation. However the regulatory agencies want to ensure that certain types of lending and assessment practices that led to non performing loans were corrected. This step is an informal agreement that does not impose restrictions.

Other local banks that have such memorandums of understanding in place, Richmond Biz Sense reports, include Virginia Business Bank, Central Virginia Bank, Consolidated Bank & Trust and Bank of Virginia.

This middle-of-the road approach must surely be a welcome relief to smaller banks that have had their special set of problems: namely they haven’t had the protection of relaxed mark-to-market accounting standards. Also, at the beginning of the downturn, despite soothing words from Washington to the contrary, local regulators were taking a very rigid approach in what constituted an appropriate level of reserve capital.