Banks with high concentrations of construction and total commercial real estate lending that exceeded supervisory criteria failed at higher rates than banks with lower concentrations, according to a white paper published by the Office of the Comptroller of the Currency 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.’ According to the white paper, 13% of banks that exceeded only the 100% construction criterion failed. Among banks that exceeded both the construction and total commercial real estate lending supervisory criteria expressed in the 2006 guidance, 23% failed during the three-year economic downturn from 2008 through 2011, compared with 0.5% of banks for which neither of the criteria were exceeded.
Construction lending was a key driver in many failures. An estimated 80% of the losses to the Federal Deposit Insurance Corp. insurance fund from 2007 to 2011 can be attributed to banks exceeding the 100% construction criterion. Banks that were public stock companies and exceeded the supervisory criteria on commercial real estate concentrations tended to experience greater deterioration in condition than banks below the criteria, as assessed by market participants. Banks with commercial real estate concentrations higher than the guidance criteria experienced larger declines in their market capital ratio during the recent economic downturn.
The full report is now online.