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CRE Concentrations

9/27/2016

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As commercial real estate concentrations industry-wide continue to grow, we have fielded numerous client questions regarding concentrations of credit.  Various historical SHP & Co. newsletters have addressed concentrations of credit.  

Historical Regulatory guidance can be reviewed in Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices (December 12, 2006).  If concentrations in CRE reach 100% in AD&C, total CRE exceeds 300%, or the bank’s CRE portfolio has expanded by 50% over the previous three years, heightened exam scrutiny can reasonably be anticipated.   

During July 2016, the FDIC issued guidance for banks with concentrations of credit in oil & gas industry.  The FIL contains specific guidance for O&G concentrations, but the guidance could be used to monitor any concentrations – including CRE.   

In addition to monitoring direct lending concentrations, institutions should attempt to quantify and monitor the following, as applicable, when analyzing the impact of expanding or contracting economic cycles on borrowers who are heavily reliant on a single industry.

  • Loans to businesses that would be immediately impacted by a growing or contracting local economy
  • Other borrowers who may also be impacted by a growing or contracting local economy, but not necessarily immediately
  • Potential compounding effects of other concentrations in the bank’s loan portfolio 
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