CRE Bank Loans To Be Thoroughly Examined By The FDIC

Banks with a high proportion of commercial real estate loans will be subject to more scrutiny from the Federal Deposit Insurance Corp.

According to American Banker, the government agency cited uncertainty surrounding labor and commerce following the coronavirus outbreak as the primary reason for the increased checks and balances.

The FDIC’s Summer 2022 Supervisory Insight bulletin states that there will be a greater emphasis on new loan activity, as well as subsectors and geographical locations suffering difficulty.

Although the majority of the banks under the FDIC’s supervision are smaller organizations, these businesses have made sizable loans to the sector. During the previous year, banks under FDIC supervision owned 41% of the $2.7T in commercial real estate loans.

FDIC inspectors noted that,  “The dollar volume of CRE loans is at an historic high, and a growing number of banks report CRE concentrations…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.”

Sectors are not being impacted evenly. According to the analysis, pandemic trends like the shift from in-person to online buying, particularly in denser urban regions, might pose problems for the portfolio health of banks.

FDIC inspectors are still circumspect even if default rates for homes affected by the pandemic are not double-digit high as they were in 2020.

“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.

Several local banks have begun to keep an eye out for any industry weak spots. Executives at Fifth Third Bank increased reserves in their commercial real estate portfolio, citing “key risks” such rapid rate increases and labor shortages.

Since the majority of its transactions have been with small CRE clients in the previous six months, First Republic Bank Chief Banking Officer Michael Selfridge stated during an earnings call that the bank has also been extra cautious and selective.

Between the first and second quarters, bank lending into the commercial real estate sector decreased by more than $8 billion, according to Trepp data cited by The Wall Street Journal.
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