The FDIC has recently issued an updated advisory to banks regarding the management of commercial real estate loan concentrations in a challenging economic climate. This guidance builds upon previous recommendations made during the global financial crisis of 2008.
In this revised advisory, Doreen Eberly, Director of the Division of Risk Management Supervision at FDIC, stresses that financial institutions play a crucial role in supporting their communities by providing credit for businesses and CRE purposes. However, concentrations in CRE lending can introduce additional risks that require careful attention. In fact, past asset quality issues and bank failures have been attributed to high levels of CRE lending combined with inadequate risk management practices.
Given current market conditions such as interest rate gaps and cap rates, the FDIC advises banks to take proactive measures including maintaining strong capital levels and appropriate credit loss allowances. Additionally, close monitoring is recommended for construction & development (C&D) loans as well as overall CRE portfolios. It is also important for banks to regularly update their financial information and analysis while strengthening their loan workout infrastructure. Finally
