Financial Update (First Quarter 2007)
Guidelines on Commercial
In December, the Federal Reserve System and other regulatory agencies issued final guidance on risk management expectations for banks heavily concentrated in commercial real estate (CRE) loans. The guidance establishes criteria to help regulators identify banks that may warrant greater scrutiny based on their CRE lending.
Southeast has seen CRE growth
Regionally, many banks' loan portfolios are weighted toward real estate. Among those, small to mid-sized institutions have experienced significant CRE growth in recent years, said Ron Zimmerman, vice president in the Atlanta Fed's Supervision and Regulation Department.
Community banks in the Southeast often have 80 percent or more of total loan dollars in CRE—loans to builders and developers of subdivisions, apartments, condos, shopping centers, hotels, and office buildings, Zimmerman said.
Loan portfolios remain strong
"Loan quality now seems very, very good," Zimmerman said. "For the past few years we have specifically stressed in our examinations and industry outreach efforts the fundamentals outlined in the guidance, and we've been pleased overall with what our banks are doing. Our point with this guidance is: You really need to understand your real estate lending and do it in a safe and sound manner."
Guidance won't alter examiners' role
The guidance is unlikely to drastically change the work of the Atlanta Fed bank examiners and other supervisory staff.
Much of the guidance is meant to ensure financial institutions have thorough information for measuring and managing CRE loan risk, Zimmerman said. Fed examiners are encouraging lenders to break out their CRE loan data in more detail to specify, for example, how many dollars are dedicated to finance particular CRE categories such as vacant-land acquisitions and residential and commercial construction.
Also, banks should be performing "what-if" scenarios. For instance, if interest rates rise 2 percentage points, will rent payments in commercial buildings they’ve financed be sufficient for building owners to meet their loan payments?
Examiners have also begun asking banks if they have established internal limits or tolerances for specific categories of CRE loans or limits for particular borrowers, Zimmerman said. The Fed also is trying to ensure that financial institutions submit meaningful, detailed CRE lending reports to their boards of directors.