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FDIC Updates Guidance for Banks with High CRE Loan Concentrations
The FDIC said Monday it had issued an updated advisory to banks on managing commercial real estate loan concentrations in a challenging economic environment. It builds on guidance the FDIC issued during the global financial crisis of 2008.
In the updated advisory, the agency’s Doreen Eberly, director, Division of Risk Management Supervision, writes, “The FDIC recognizes that financial institutions play a critical role in the economic vitality of the communities they serve by providing credit for businesses, often for CRE purposes, including real estate development. However, concentrations in CRE lending add dimensions of risk that warrant attention. CRE lending concentrations, combined with weak risk management practices, contributed significantly to past asset quality problems and bank failures.”
Citing current risk factors including a gap between interest rates and cap rates, the FDIC’s advisory recommends that banks take the following steps:
- Maintain strong capital levels;
- Ensure that credit loss allowances are appropriate;
- Manage construction and development (C&D) and CRE loan portfolios closely;
- Maintain updated financial and analytical information;
- Bolster the loan workout infrastructure; and
- Maintain adequate liquidity and diverse funding sources.
Pictured: FDIC headquarters in Washington, DC. Photo courtesy of Grunley Construction.
- ◦Financing
