This past December, the regulatory community telegraphed their intentions of focusing bank examinations on commercial real estate (CRE) concentrations in 2016: “During 2016, supervisors from the banking agencies will continue to pay particular attention to potential risks associated with CRE lending” (SR 15 17, Dec 2015).
If you are a large bank, the share of commercial real estate (CRE) as a percentage of your balance sheet is likely slightly less than 5%. However, if you are a community bank, the share is likely over 20%, and growing. Even when viewed as a percentage of Tier-1 capital, larger banks hold about four times for commercial real estate exposure. That is a pretty big difference and CEOs (plus risk managers) should at least be asking the question as to why.
For many community banks, a concentration in real estate lending may be an issue. This is especially concerning given the recent decrease in capitalization (cap) rates across many geographies and property classes. While community bankers have a difficult job trying to diversify their balance sheet away from real estate, we wanted to present a couple quantitative points that will make the job of risk management easier for banks.