Advisory: Managing Commercial Real Estate Concentrations in a Challenging Economic Environment

The FDIC advises that it is issuing this advisory to reemphasize the importance of strong capital, appropriate credit loss allowance levels, and robust credit risk-management practices for institutions with commercial real estate (CRE) concentrations. It also conveys several key risk management practices for institutions to consider in managing CRE loan concentrations in the current challenging economic environment. Additionally, the advisory reemphasizes the importance of effectively managing liquidity and funding risks, which can compound lending risks, particularly for CRE-concentrated institutions.

Highlights:

• The FDIC is issuing this Financial Institution Letter to reemphasize the importance of strong capital and credit loss allowance levels, as well as robust credit risk management practices, for institutions with concentrated CRE exposures.
• Institutions with significant CRE concentrations are advised to consider the risk management principles discussed in the joint Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices (issued December 6, 2006), and the Interagency Policy Statement on Allowances for Credit Losses (Revised April 27, 2023).
• The advisory also identifies key risk-management actions for financial institutions with significant CRE concentrations to manage through changes in market conditions:
  • Maintain strong capital levels,
  • Ensure that credit loss allowances are appropriate,
  • Manage construction and development (C&D) and CRE loan portfolios closely,
  • Maintain updated financial and analytical information,
  • Bolster the loan workout infrastructure, and
  • Maintain adequate liquidity and diverse funding sources.
• Institutions are encouraged to continue making CRE credit available in their communities using prudent lending standards that rely on strong underwriting and loan administration practices.

Click here to read the full advisory from the Federal Deposit Insurance Corporation.

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