Increased FDIC oversight incoming for CRE bank loans

A recent report from the Federal Deposit Insurance Corporation (FDIC) states that Commercial Real Estate (CRE) lenders are about to come under greater scrutiny. In the report, titled “Supervisory Insights Summer 2022”, the agency adds that there will be an increased focus on new lending activity, along with CRE sectors and geographic areas that are “under stress.”

This comes on the back of a record year, with “the volume of CRE loans held by banks recently peaking at more than USD2.7 trillion.” And while FDIC doesn’t oversee all these institutes, banks supervised by the FDIC account for around USD1.1 trillion of that amount.

Quantifying risk

The agency adds that there will be increased emphasis on transaction testing (i.e. sampling individual lending transactions), saying:

“Given the uncertain long-term impacts of changes in work and commerce in the wake of the pandemic, the effects of rising interest rates, inflationary pressures, and supply chain issues, examiners will be increasing their focus on CRE transaction testing in the upcoming examination cycle.”

Areas of concern 

During 2021, FDIC examiners noted some specific CRE loan concerns, including poor risk analyses and improper assessments of whether loans could be successfully repaid. For example, some assessments failed to check whether a borrower’s business would be able to repay the loan when stimulus or other relief funds were no longer in the balance sheet.

Another area where some banks seemed to fall flat was in conducting a thorough and up-to-date analysis of prevailing market conditions. The agency added that examiners also saw cases where banks have “applied segmentation techniques ineffectively” or “have not drawn conclusions from the analyses performed.”

CRE lending outlook

Specific sectors identified as challenging for valuation in 2021 included some hospitality properties, offices, and malls, along with “some geographies, such as the Manhattan borough of New York City, [which] lagged.” In a Bloomberg article on the report, Brandywine Global portfolio manager, Tracy Chen added that “there are some challenges in pockets of CRE debt, such as offices and retails.”

In an environment where some banks have already announced cutbacks on CRE lending, the additional scrutiny may mean those lenders adopt an even more cautious disposition, especially for sectors they consider “high risk.”

Have there been any effects from changing lending policies on deal-making in your area?

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