I. INTRODUCTION
The federal banking agencies have issued an interagency statement regarding supervisory findings about commercial real estate (CRE) lending activities. The agencies have observed substantial growth in many markets, increased competitive pressures, rising concentrations, and an easing of underwriting standards. The interagency statement reminds financial institutions of existing regulatory guidance on prudent risk management practices for CRE lending activity through economic cycles.
II. BACKGROUND
The agencies have observed the following recent trends:
Historical evidence demonstrates that financial institutions with weak risk management and high CRE credit concentrations are exposed to a greater risk of loss and failure. In general, financial institutions that succeeded during difficult economic cycles took the following actions, which are consistent with supervisory expectations:
III. SUPERVISORY EXPECTATIONS FOR FINANCIAL INSTITUTIONS
Financial institutions should review their policies and practices related to CRE lending and should maintain risk management practices and capital levels commensurate with the level and nature of their CRE concentration risk. In particular, financial institutions should maintain underwriting discipline and exercise prudent risk management practices that identify, measure, monitor, and manage the risks arising from their CRE lending activity. Financial institutions are especially encouraged to review the interagency “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (Concentration Guidance), 71 Fed. Reg. 74580 issued in December 2006 for a discussion of the agencies’ expectations for concentration risk management practices.
During 2016, supervisors from the banking agencies will continue to pay special attention to potential risks associated with CRE lending. When conducting examinations that include a review of CRE lending activities, the agencies will focus on financial institutions’ implementation of the prudent principles in the Concentration Guidance as well as other applicable guidance relative to identifying, measuring, monitoring, and managing concentration risk in CRE lending activities. In particular, the agencies will focus on those financial institutions that have recently experienced, or whose lending strategy plans for, substantial growth in CRE lending activity, or that operate in markets or loan segments with increasing growth or risk fundamentals. The agencies may ask financial institutions found to have inadequate risk management practices and capital strategies to develop a plan to identify, measure, monitor, and manage CRE concentrations, to reduce risk tolerances in their underwriting standards, or to raise additional capital to mitigate the risk associated with their CRE strategies or exposures.