Growth in commercial real estate finance at financial institutions has prompted their regulators to encourage the banks to take steps to minimize risk in their lending practices.
Historically low capitalization rates and rising property values have led to substantial growth in commercial mortgage lending by banks in many of the nation’s markets.
There is currently no weakness in CRE markets when it comes to vacancy and absorption rates, and the same can be said for the rate of non-performing loan and charge-offs.
This has led bank regulators to observe that CRE concentration levels have been rising at financial institutions, while underwriting standards and loan terms have eased.
That is according to a statement on prudent risk-management for CRE lending jointly issued Friday by the Federal Deposit Insurance Corp., the Federal Reserve Board and the Office of the Comptroller of the Currency.
“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,” the notice stated.
Such
risk management combined with high CRE credit concentrations expose the institutions to a greater risk of loss and failure.
In order to ensure that financial institutions succeed during difficult economic cycles, the regulators are encouraging institutions to establish adequate and appropriate
loan policies, underwriting standards, credit risk management practices and concentration limits that were approved by the board or a designated committee.
They should also ensure that lending strategies and capital adequacy strategies are sound.
“In light of the developments mentioned above, 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,” the statement said. “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.”
The regulators indicated that they intend to pay special attention next year to risks associated with CRE lending.
