OCC Releases OCC/Fed Joint Study on 2006 CRE Concentration Guidance

WASHINGTON — Banks with high concentrations of construction and total commercial real estate (CRE) lending that exceeded supervisory criteria failed at higher rates than banks with lower concentrations, according to a white paper published today by the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board.

The white paper presents findings from the regulators’ study of bank performance in the context of the 2006 interagency guidance, “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices.” In summary, this guidance established supervisory criteria for banks that exceeded 100 percent of capital in construction lending and 300 percent of capital in total CRE lending. The study covered national- and state-chartered commercial banks but did not include savings associations. Key findings of the study include:

• Thirteen percent of banks that exceeded only the 100 percent construction criterion failed. 
• Among banks that exceeded both the construction and total CRE lending supervisory criteria expressed in the 2006 guidance, 23 percent failed during the three-year economic downturn from 2008 through 2011, compared with 0.5 percent of banks for which neither of the criteria was exceeded. 
• Construction lending was a key driver in many failures. An estimated 80 percent of the losses to the Federal Deposit Insurance Corporation insurance fund from 2007 to 2011, can be attributed to banks exceeding the 100 percent construction criterion. 
• Banks that were public stock companies and exceeded the supervisory criteria on CRE concentrations tended to experience greater deterioration in condition than banks below the criteria, as assessed by market participants. Banks with CRE concentrations higher than the guidance criteria experienced larger declines in their market capital ratio during the recent economic downturn.

Related Link

• An Analysis of the Impact of the Commercial Real Estate Concentration Guidance (PDF)