Supervisory Insights, Fall 2019
Commercial Real Estate Loan Concentration Risk Management
By: Stephen Rountree
The most recent issue of Supervisory Insights (SI) included a discussion of AD&C lending and CRE concentrations. The SI assessed Second Quarter 2019 Median Data for Acquisition, Development & Construction concentrated insured institutions; Commercial Real Estate concentrated institutions, and other insured institutions.
The study included 470 regulatory examinations (banks with composite ratings of 1, 2, or 3 at exam inception over a twenty four month period that ended March 2019. The review identified matters requiring board attention in ~24% of the entities. Items requiring additional board oversight were largely centered in: Governance and Oversight, Portfolio Sensitivity Analyses, Portfolio Management, and Funding Strategies.
Source: https://www.fdic.gov/regulations/examinations/supervisory/insights/sifall19/si-fall-2019.pdf
- Governance and Oversight: 56% of the reviews included recommendations for additional board / management oversight, and ~27% of the recommendations included matters requiring board attention. MRBA were chiefly noted for ‘inadequate’ concentration limits (and sub limits), heightened loan policy exception tracking & reporting as well as strategic planning. The review indicates increased Regulatory concern for banks where concentration management & limits were addressed by ‘merely had increased the policy’s concentration limit(s) to avoid exceptions”.
- Portfolio Sensitivity Analyses: Sensitivity analysis & stress testing will vary depending of a bank’s size, complexity and other risk characteristics. Within the sampled bank, regulators recommended portfolio sensitivity analysis in ~41% banks, and 22% resulted in matters requiring board attention. A chief regulatory concern for portfolio monitoring & stress testing was not integrating the test results within oversight and planning. Additional regulatory concern was noted for apparently unrealistic or comprehensive assumptions as well as basing assumptions on overall industry data rather than the individual bank’s data.
- Portfolio Management: Regulators expressed concern for concentrations risks that can ‘expose an IDI to unacceptable risk if not properly managed and monitored’. Findings were noted in 37% of the reviews, and >28% of the pool involved items requiring board level attention. Matters requiring board attention were chiefly noted for lack of establishing and monitoring primary & secondary concentration limit(s). Regarding underwriting, >27% of the reviews yielded CRE underwriting related recommendations with 14% of the subset involving board attention. Findings were largely for:
- Inadequate analyses of repayment capacity
- Inadequate global debt service coverage analyses
- Having problems calculating global cash flows
- Not completing or considering global cash flow analyses at all, when it was applicable
- Inadequate analyses of repayment capacity
Source: https://www.fdic.gov/regulations/examinations/supervisory/insights/sifall19/si-fall-2019.pdf