FDIC To Increase Scrutiny Of Banks' CRE Loans

The Federal Deposit Insurance Corp. plans to increase its stress testing of banks that have a high concentration of commercial real estate loans.

The government agency cited uncertainties pertaining to work and commerce since the coronavirus pandemic as the main factor for the heightened oversight, American Banker reports.

There will be more focus on new lending activity, as well as subsectors and geographic areas experiencing stress, according to The FDIC's Summer 2022 Supervisory Insight bulletin.

Most of the banks supervised under the FDIC are smaller institutions; however, these companies have loaned a massive amount into the industry. In the past year, FDIC-supervised banks held 41% of the $2.7T in commercial real estate loans.

"The dollar volume of CRE loans is at an historic high, and a growing number of banks report CRE concentrations," FDIC examiners wrote. "The majority of banks with CRE loan concentrations are satisfactorily rated. Nevertheless, CRE loan concentrations add dimensions of risk that necessitate continued attention from banks and their regulators, especially as the pandemic lingers and uncertainties remain."

Not all sectors are being hit equally. The report said pandemic trends like the move away from brick-and-mortar shopping to remote shopping, especially in denser metropolitan areas, can present challenges for the health of banks' portfolios.

Although delinquency rates for properties hit by the pandemic are not at the double-digit level they were in 2020, FDIC examiners are still cautious.

"While more recently improved, the delinquency rates remain above pre-pandemic levels. The [FDIC Quarterly] article indicates that economic stress caused by the pandemic is one of the challenges facing the CRE industry and the lending landscape," the FDIC bulletin states.

A number of regional banks have started to watch for any weak points in the industry. Fifth Third Bank executives elevated its reserves in its commercial real estate portfolio citing "key risks" such as aggressive rate hikes and labor supply constraints. 

First Republic Bank Chief Banking Officer Michael Selfridge said in an earnings call that the bank has also been extra cautious and selective the past six months since most of its deals are with small CRE clients.

Bank lending to commercial real estate dropped by more than $8B between the first and second quarters, according to Trepp data reported by The Wall Street Journal.