The Government Accountability Office (GAO) recently conducted an evaluation of commercial real estate lending outcomes, determining banks face increased risk and regulators are assessing risk management practices.
GAO officials said the agency’s trend and econometric analyses indicate risk in commercial real estate (CRE) lending by banks has increased over the past several years. Since the early 2000s, community banks have tended toward providing CRE loans more than other kinds of loans.
The GAO said federal banking regulators subjected banks with relatively high CRE concentrations to greater supervisory scrutiny based on its review of a
non-generalizable sample of 54 bank examinations covering 40 banks done by the Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System and Office of the Comptroller of the Currency from 2013 through 2016.
Of the 54 examinations reviewed by GAO, 41 covered banks with relatively high CRE concentrations.
Regulators examined whether banks had adequate risk management practices and capital to manage their CRE concentration risk.
In 26 of the 41 examinations, officials said, regulators did not find any risk management weaknesses – but in 15 of the 41 examinations, regulators found banks had weaknesses in one or more risk management areas, such as board and management oversight, management information systems, or underwriting.
Regulators generally communicated their findings to the banks in the reports of examination and directed the banks to correct their risk management weaknesses.