Commercial Real Estate Concentration

Monitoring your financial institution's commercial real estate (CRE) exposure is crucial for maintaining financial stability and mitigating risks. CRE concentration refers to the extent to which your institution is involved in real estate investments, loans, and related activities.

Effective monitoring helps ensure that your firm maintains a balanced portfolio, adheres to regulatory requirements, and makes informed decisions to safeguard its financial health. This proactive approach not only protects your firm's cash but also enhances its ability to respond to market changes and capitalize on opportunities.

Here are a few things to look for when monitoring your bank's CRE concentration

Maintaining Strong Capital Levels

The FDIC emphasizes the importance of maintaining strong capital levels to protect against unexpected losses, particularly in stressed markets. Banks with significant CRE exposures may require more capital due to the elevated risk of unexpected losses caused by uncertain market conditions.

Ensuring Appropriate Credit Loss Allowances

It is crucial for institutions to determine their Allowance for Credit Losses (ACL) in accordance with U.S. GAAP and regulatory reporting instructions. This involves periodic analysis of the collectability of CRE and other exposures, maintaining ACLs at a level appropriate to cover expected credit losses.

Close Management of CRE Loan Portfolios

Institutions should maintain prudent lending standards and credit administration practices, considering the risks of material CRE concentrations. This includes stress testing and sensitivity analysis to prepare for credit risk problems before they impact earnings and capital.

Read the full advisory by the FDIC.