Treliant Takeaway…FDIC Guidance on CRE Concentrations

Managing Commercial Real Estate Concentrations in a Challenging Economic Environment

• Source: fdic.gov

Takeaway:

With interest rates still at historically high levels and credit portfolios starting to demonstrate signs of weakness in the system, the FDIC is reiterating its focus on credit quality, capital adequacy/management, allowance for credit losses, portfolio monitoring, credit concentrations, and maintaining liquidity and diversity in funding sources.

Banks should be proactive in analyzing the guidance to determine any weaknesses in their policies, processes, data, reporting, and overall governance in the areas noted. This is particularly true for institutions with high concentrations in commercial real estate (CRE).

Treliant’s unique combination of credit, data, and capital and liquidity experts can help financial institutions quickly identify gaps and create action plans to address any weaknesses.

Highlights:

On December 18, 2023, the FDIC issued an advisory statement to reemphasize the importance of strong capital, appropriate credit loss allowance levels, and robust credit risk-management practices for institutions with CRE concentrations.

The advisory conveys the following key risk management practices for institutions to consider in managing CRE loan concentrations in the current challenging economic environment. The practices are not new, however they updated and enhanced from previously issued guidance.

1. Maintain strong capital levels.
2. Ensure that credit loss allowances are appropriate.
3. Manage construction and development (C&D) and CRE loan portfolios closely.
4. Maintain updated financial and analytical information.
5. Bolster the loan workout infrastructure.
6. Maintain adequate liquidity and diverse funding sources.

Additionally, the advisory reemphasizes the importance of effectively managing liquidity and funding risks, which can compound lending risks, particularly for CRE-concentrated institutions.

This advisory replaces the 2008 advisory: Managing Commercial Real Estate Concentrations in a Challenging Environment (issued March 17, 2008).