FDIC examiners will increase their focus on commercial real estate loan concentration in the upcoming exam cycle as economic pressures and changes in work and commerce habits continue to elevate CRE lending risk, according to the most recent issue of the agency’s Supervisory Insights published today.
The number of banks exceeding supervisory CRE concentration criteria—as defined by interagency guidelines established in 2006—grew to about 9% of banks in 2021, the agency said. That is well below pre-pandemic levels, but FDIC noted several potential uncertainties facing the CRE market. They include pandemic-induced societal changes: downward pressure for office space as more employees worked remotely, increased hotel vacancies and a reduction in shopping at brick-and-mortar retailers. The agency also cited inflation, rising interest rates and supply chain challenges as potentially increasing risk.
Given those uncertainties, “examiners will be increasing their focus on CRE transaction testing in the upcoming examination cycle. In particular, examiners will be testing newer CRE credits, credits stressed within sub-categories and geographies, and credits with payments vulnerable to rising rates and rising costs,” the agency said.
FDIC also noted that banks with well-developed risk management practices generally adapted better during the pandemic. “For banks substantively involved in CRE lending, this was especially true when robust contingency planning and stress testing/scenario analysis processes were in place.”