On March 7, the FDIC released its Supervisory Highlights including an article that focuses on credit risk management in a time of rapid loan growth at many banks. The article focused on three areas that have seen the highest concentration of loan growth including commercial real estate.
According to the FDIC, historically, commercial real estate, particularly the acquisition, development, and construction subset, is susceptible to cyclical and competitive factors that result in significant losses. Studies found that the ability to withstand the commercial real estate market depended heavily on the adequacy of risk management practices and capital levels.
In the past, FDIC examinations of commercial real estate lenders indicated weaknesses in loan underwriting, administration and oversight practices. The FDIC suggests many credit risk management practices within the article such as: (1) adopting and implementing lending policies, practices, and underwriting that are appropriate for the size and complexity of the bank’s business model; (2) maintaining strong administration and oversight of lending activities and the related funding strategy; and (3) ensuring adequate allowance for loan and lease losses and capital levels.
The FDIC’s Supervisory Highlights Winter Edition can be found here: https://www.fdic.gov/regulations/examinations/supervisory/insights/siwin16/si_winter_16.pdf.