Banks' Commercial Real Estate Lending Under Fire From Regulatorsby
Fed, OCC, FDIC to pay `special attention' to risks next year
Concerns come as underwriting standards have been lowered
U.S. banking regulators are ready to force changes to lending practices and establish tougher capital demands for firms that have dangerously lowered their standards in commercial real estate, the three main agencies said in a joint statement.
After observing problems in rapidly growing loan portfolios, the regulators warned the industry on Friday that those with insufficient safeguards may be told to come up with plans for cleaning up their practices or to raise additional capital to mitigate the risk. Next year, supervisors from the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. will be paying “special attention” to these risks, they said.
Banks that have seen substantial growth in their commercial real estate lending or whose expansion strategies call for it will get the most scrutiny. The regulators’ concerns stem from banks lowering their standards as competition has heated up to originate the loans. Commercial real estate values have surged since 2010 on the backs of low-cost loans, foreign buyers and the hunt for yield in the low interest-rate environment.
“Financial institutions should maintain underwriting discipline and exercise prudent risk management practices that identify, measure, monitor, and manage the risks,” the regulators said in a statement.
Commercial real estate practices were flagged by the OCC in its twice-yearly report on industry risks earlier this week. Comptroller of the Currency Thomas Curry said banks were reaching for yield and growth, and sometimes extending their reach at the expense of sound underwriting, strong risk management and adequate loan-loss provisioning.