Total loan balances at FDIC-insured banks grew 6.8 percent between September 2015 and September 2016, with considerable growth occurring in commercial real estate and agricultural lending portfolios, the agency said in the winter issue of its Supervisory Insights publication released today. The report highlighted credit risk trends in CRE, ag, and O&G lending, and reiterated the importance of maintaining strong risk management processes.
“Historically, financial institutions that have prudently managed loan growth have been better positioned to withstand better positioned to withstand periods of stress and continue to serve the credit needs of their local communities,” said Doreen Eberley, director of the FDIC’s Division of Risk Management Supervision. “We encourage bankers to identify and correct loan underwriting and administration problems before they adversely affect the bottom line.”
The report noted that on-balance sheet CRE loans in particular have seen significant increases over the last few years, and have now surpassed the pre-crisis peak volume, totaling $2 trillion as of September 2016. Drawing from more than two decades of historical data, the FDIC warned that community banks specializing in CRE had a failure rate 2.25 times that of the average community bank, and stressed that banks’ ability to withstand market volatility is dependent on having robust capital and risk management frameworks in place.
While the FDIC noted that its guidance on CRE concentrations does not establish a specific concentration limit that applies to all banks, it reminded banks that risk management around CRE should include several key elements, including board and management oversight, portfolio management, management information systems, market analysis, credit underwriting standards, portfolio stress testing and sensitivity analysis and credit risk function review.
In addition to CRE, the FDIC said it has also seen concentrations growing among banks making agricultural and oil and gas loans, and cautioned that these loans are susceptible to volatile market forces. The ag sector, for example, has seen net farm income decline and low commodity prices in recent years, while the oil and gas industry has been affected by significant changes in supply and demand.