In a stark warning to commercial real estate lenders, federal banking agencies today issued a statement hoping to reinforce prudent risk-management practices and saying they would be paying close in their reviews in 2016 focusing on those practices.
The agencies have observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards.
Particularly, the agencies noted, that reassuring trends in asset-quality metrics have boosted many institutions’ CRE concentration levels.
At the same time, this has increased competitive pressures and revealed an easing of CRE underwriting standards, including less-restrictive loan covenants, extended maturities, longer interest-only payment periods, and limited guarantor requirements.
The agencies also have observed certain risk management practices at some institutions that cause concern, including a greater number of underwriting policy exceptions and insufficient monitoring of market conditions to assess the risks associated with these concentrations.
Financial institutions should maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending, the agencies said. Financial institutions should have risk-management practices and maintain capital commensurate with the level and nature of their CRE concentration risk.
The statement reinforces existing guidance for CRE risk management and contains a table that lists interagency regulations and guidance related to CRE lending activities.
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.
Going forward, the agencies said they would be reviewing CRE lending activities. They will focus their reviews on financial institutions’ implementation of the prudent principles in applicable guidance relative to identifying, measuring, monitoring, and managing concentration risk in CRE lending activities.
During 2016, supervisors from the banking agencies will continue to pay special attention to potential risks associated with CRE lending. 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. They will also focus on those institutions 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, the statement said.
