Study shows regulators identifying rising CRE lending risk, taking action

Banks have increased their risk in commercial real estate (CRE) lending since the Great Recession of 2007-09, but regulators are – for the most part – adequately dealing with the banks that have developed weakness in their management of the risk, a study released Thursday stated.

The study released by the Government Accountability Office (GAO) found that federal banking regulators, including the Federal Deposit Insurance Corp. (FDIC), Federal Reserve System (The Fed), and Office of the Comptroller of the Currency (OCC), subjected banks with relatively high CRE concentrations to greater supervisory scrutiny.

The GAO said it based that finding on its review of a nongeneralizable sample of 54 bank examinations covering 40 banks conducted among the three regulators, over the period of 2013-16.

“Of the 54 examinations that GAO reviewed, 41 of them covered banks with relatively high CRE concentrations,” GAO said in its report, Banks Potentially Face Increased Risk; Regulators Generally Are Assessing Banks’ Risk Management Practices, published Thursday. “In all of these examinations, regulators examined whether the banks had adequate risk management practices and capital to manage their CRE concentration risk. In 26 of the 41 examinations, regulators did not find any risk management weaknesses,” GAO reported.

However, the congressional watchdog noted, in 15 of the 41 examinations, regulators found the banks had weaknesses in one or more risk management areas, such as board and management oversight, management information systems, or underwriting.

“The regulators generally communicated their findings to the banks in the reports of examination and directed the banks to correct their risk management weaknesses,” GAO stated.

The agency conducted the study, it said, as concentrations in CRE loans at U.S. banks have been steadily increasing – raising safety and soundness concerns. In December 2015, GAO said, the regulators jointly issued a public statement to remind banks of the 2006 CRE guidance.

Following that statement, the agency said, it determined it would examine trends in the CRE lending market, including changes in risk, and look at actions taken by regulators “to help ensure that banks with CRE concentrations are effectively managing the related risks.”

Commercial Real Estate Lending: Banks Potentially Face Increased Risk; Regulators Generally Are Assessing Banks’ Risk Management Practices