The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of Currency issued a statement noting increasing demand and competition in the commercial real estate (CRE) market, as well as “easing” of CRE underwriting standards. The statement also highlights CRE practices, the characteristics of financial institutions that have prevailed during difficult economic cycles, and goes on to define additional expectations for firms to consider. Within the joint statement there is a specific focus on CRE concentration risk monitoring and management.1

Summary of Findings

The federal banking agencies point to the following CRE Market conditions as contributing to rising CRE concentration levels:2

  • CRE asset and lending markets are experiencing significant growth
  • Competitive pressures among financial institutions are increasing
  • Capitalization rates are historically low, while property values are rising
  • Market and Asset Quality indicators currently do not indicate portfolio weaknesses

In light of the concentration growth, the agencies note the following changes to underwriting and credit risk management practices that are cause for concern:3

  • Easing of underwriting standards
  • Less restrictive loan covenants
  • Extended maturities
  • Longer interest-only periods
  • Limited guarantor requirements
  • Greater number of underwriting policy exceptions
  • Insufficient monitoring of market conditions

Characteristics of Adequate Practices

In the statement, the federal banking agencies recognize the characteristics of financial institutions that succeeded during difficult economic cycles. In particular, they highlight the following points held by these firms:4

  • Established adequate and appropriate:
    • Loan policies, underwriting standards, credit risk management practices, and concentration limits that were approved by the board or a designated committee;
    • Lending strategies, such as plans to increase lending in a particular market or property type, limits for credit and other asset concentrations, and processes for assessing whether lending strategies and policies continued to be appropriate in light of changing market conditions; and
    • Strategies to ensure capital adequacy and allowance for loan losses that supported an institution’s lending strategy and were consistent with the level and nature of inherent risk in the CRE portfolio.
  • Conducted global cash flow analyses based on reasonable (not speculative) rental rates, sales projections, and operating expenses to ensure the borrower had sufficient repayment capacity to service all loan obligations.
  • Performed market and scenario analyses of their CRE loan portfolio to quantify the potential impact of changing economic conditions on asset quality, earnings, and capital.
  • Provided their boards and management with information to assess whether the lending strategy and policies continued to be appropriate in light of changes in market conditions.
  • Assessed the ongoing ability of the borrower and the project to service all debt as loans converted from interest-only to amortizing payments or during periods of rising interest rates.
  • Implemented procedures to monitor the potential volatility in the supply and demand for lots, retail and office space, and multi-family units during business cycles.
  • Maintained management information systems that provided the board and management with sufficient information to identify, measure, monitor, and manage concentration risk.
  • Implemented processes for reviewing appraisal reports for sufficient information to support an appropriate market value conclusion based on reasonable market rental rates, absorption periods, and expenses.

Supervisory Expectations

In addition to the adequate practices defined above, which the agencies endorse, the statement also defines expectations that include financial institutions reviewing their policies, standards, and practices related to CRE lending and credit risk management. The agencies highlight concentration risk monitoring and management, and that institutions maintain adequate capital levels that consider their CRE concentration risk. The statement provides a list of interagency regulations and guidance specific to CRE, implying that these items will be a specific focus in upcoming exams.

The federal banking agencies note that they will plan exams in 2016 for institutions who recently experienced, or will experience growth in CRE lending, or operate in markets or segments with CRE growth. The statement highlights that CRE concentration guidance will be a specific area of focus for the regulators during the exams.


  1. “Statement of Prudent Risk Management for Commercial Real Estate Lending,” Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. Access at:
  2. Ibid
  3. Ibid
  4. Ibid

Newsletter Author: Jeffrey Jamison | Amit Gupta

Newsletter Contact Person: Craig Unterseher


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