Commercial real estate concentrations at banks and credit unions are becoming a frequent topic of discussion during regulatory exams, according to a poll conducted by North Carolina-based financial information company Sageworks.
According to the poll, which was conducted in October and received more than 100 responses from bank executives, 47 percent reported “much discussion” about CRE concentrations during their most recent regulatory exam.
Another 41 percent said it was brought up, but they were not required to go into detail. Only 12 percent of respondents reported CRE concentrations did not come up during their exam.
“Banks that [had significant] CRE concentration during the last downturn, 20 percent of those banks failed. … So that provides a little bit of historical context for why the regulators are voicing some concern at this point,” Liz Williams, managing director at financial consulting firm CEIS Review, said in a statement.
Commercial real estate has been brought up numerous times this year, as regulators have expressed worry that banks may be taking excessive risk by trying to capitalize on a period of low interest-rates and easy lending policies.
Some members of the Federal Open Market Committee in July expressed concern that “smaller banks could be assuming significant risks in efforts to expand their CRE (commercial real estate) lending.”
According to a federal interagency guidance, banks will draw intensified scrutiny if CRE loans (excluding owner-occupied loans) represent 300 percent or more of the institution’s total risk-based capital.
During the webinar, Williams went on to comment that, in her experience, even banks that don’t currently have significant CRE concentrations may want to prepare for increased regulatory scrutiny as they grow.
“Anecdotally from talking with our clients, we’ve seen a wide range,” she said. “We’ve seen some banks that are not yet at the 300 percent threshold, say, that regulators have been all over this issue, and that’s mainly because of growth. So something to keep in mind too, if you’re not at the 300 percent level but you’re over that 50 percent growth target you might find yourself facing some scrutiny.”
