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Joint Press Release

Office of the Comptroller of the Currency
Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation

For Immediate Release

December 6, 2006

Federal Banking Agencies Issue Final Guidance
On Concentrations in Commercial Real Estate Lending
The Office of the Comptroller of the Currency, the Board of Governors of the Federal
Reserve System, and the Federal Deposit Insurance Corporation on Wednesday issued final
guidance on sound risk management practices for concentrations in commercial real estate
lending. The guidance is intended to help ensure that institutions pursuing a significant
commercial real estate lending strategy remain healthy and profitable while continuing to
serve the credit needs of their communities.
The agencies have observed that commercial real estate is an area in which some banks are
becoming increasingly concentrated. This trend is particularly evident among small- to
medium- sized banks that are facing strong competition in other business lines. The agencies
support banks serving a vital role in their communities by supplying credit for business and
real estate development. However, the agencies are concerned that rising commercial real
estate loan concentrations may expose institutions to unanticipated earnings and capital
volatility in the event of adverse changes in commercial real estate markets.
The final Interagency Guidance on Concentrations in Commercial Real Estate Lending,
Sound Risk Management Practices reminds institutions that strong risk management
practices and appropriate levels of capital are important elements of a sound lending
program, particularly when an institution has a concentration in commercial real estate
loans. The final guidance reinforces and enhances existing regulations and guidelines for
safe and sound real estate lending. The guidance provides supervisory criteria, including
numerical indicators to assist in identifying institutions with potentially significant CRE
loan concentrations that may warrant greater supervisory scrutiny. These criteria do not
constitute limits on CRE lending.
On January 10, 2006, the agencies issued proposed interagency guidance on concentrations
in commercial real estate lending. The agencies have carefully considered these comments
on the proposal and, as a result, have made changes to the proposal to clarify its purpose and
respond to commenters’ concerns. While the fundamental principles of the final guidance
remain unchanged, the agencies have revised the guidance to:
Emphasize that the guidance does not limit banks’ commercial real estate lending, but
rather guides institutions in developing risk management practices and levels of
capital that are commensurate with the level and nature of their commercial real estate

Emphasize that the guidance is focused on commercial real estate loans that are
dependent upon the cash flow from real estate held as collateral and sensitive to
conditions in the commercial real estate market.
Clarify that the guidance is not intended to apply to loans where commercial real
estate collateral is taken as a secondary source of repayment or through an abundance
of caution.
Clarify that numerical screening criteria will be used as a supervisory monitoring tool
to focus supervisory resources on institutions that may have significant commercial
real estate loan concentration risk. A loan growth screen has been added to identify
institutions with both high commercial real estate concentrations and recent rapid
increases in these portfolios.
Clarify that the strength of an institution’s lending and risk management practices will
be taken into account in supervisory evaluation of capital adequacy.
The agencies are committed to ensuring consistent application of this guidance and are
developing training programs for their supervisory staff. These training materials will
emphasize that the numerical screening criteria are not to be viewed as limits on an
institution’s commercial real estate lending activity.
The guidance is attached.
Federal Register Notice 84 KB PDF | TEXT
2006 Banking and consumer regulatory policy
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Last update: December 12, 2006