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Highlights

Since the onset of the financial crisis in 2008, commercial real estate (CRE) loan delinquencies have more than doubled. The federal banking regulators have issued statements and guidance encouraging banks to continue lending to creditworthy borrowers and explaining how banks can work with troubled borrowers. However, some banks have stated that examiners' treatment of CRE loans has hampered their ability to lend. This report examines, among other issues, (1) how the Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve System (Federal Reserve), and the Office of the Comptroller of the Currency (OCC) responded to trends in CRE markets and the controls they have for helping ensure consistent application of guidance and (2) the relationships between bank supervision practices and lending. GAO reviewed agency guidance, examination review procedures, reports of examination, and relevant literature and interviewed agency officials, examiners, bank officials, and academics..

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Federal Deposit Insurance Corporation 1. To improve supervision of CRE-related risks, the Chairman of the Federal Deposit Insurance Corporation, the Chairman of the Board of Governors of the Federal Reserve System, and the Comptroller of the Currency should enhance and either re-issue or supplement interagency CRE concentration guidance--based on agreed-upon standards by FDIC, the Federal Reserve, and OCC--to provide greater clarity and more examples to help banks comply with CRE concentration and risk-management requirements and help examiners ensure consistency in their application of the guidance, especially related to reductions in CRE concentrations and calculation of CRE concentrations.
Closed - Implemented
FDIC supplemented the interagency CRE (commercial real estate) concentration guidance to provide greater clarity to examiners by revising its guidance and instructions for assessing concentration risk when completing bank examinations. In November 2014, FDIC issued a Regional Director Memorandum titled Revised Concentrations Page and Instructions for the Risk Management Report of Examination. The memo described the revisions to the Concentrations page in the Risk Management Report of Examination and related instructions to enhance the identification and risk analysis of concentrated credit and funding exposures, including CRE concentrations.
Board of Governors 2. To improve supervision of CRE-related risks, the Chairman of the Federal Deposit Insurance Corporation, the Chairman of the Board of Governors of the Federal Reserve System, and the Comptroller of the Currency should enhance and either re-issue or supplement interagency CRE concentration guidance--based on agreed-upon standards by FDIC, the Federal Reserve, and OCC--to provide greater clarity and more examples to help banks comply with CRE concentration and risk-management requirements and help examiners ensure consistency in their application of the guidance, especially related to reductions in CRE concentrations and calculation of CRE concentrations.
Closed - Implemented
In 2013, the Federal Reserve and OCC jointly issued a study that assessed the impact of the 2006 CRE concentration guidance. The study included a technical appendix that explains how to calculate the CRE thresholds using Call Report data, which provided additional clarity on how to use the 2006 guidance. In addition, the Federal Reserve provided its examiners with internal training to clarify how they should apply the principles in the 2006 CRE guidance and use a new template for calculating the threshold criteria based on changes to the Call Report.
Office of the Comptroller of the Currency 3. To improve supervision of CRE-related risks, the Chairman of the Federal Deposit Insurance Corporation, the Chairman of the Board of Governors of the Federal Reserve System, and the Comptroller of the Currency should enhance and either re-issue or supplement interagency CRE concentration guidance--based on agreed-upon standards by FDIC, the Federal Reserve, and OCC--to provide greater clarity and more examples to help banks comply with CRE concentration and risk-management requirements and help examiners ensure consistency in their application of the guidance, especially related to reductions in CRE concentrations and calculation of CRE concentrations.
Closed - Implemented
In December 2011, OCC supplemented the interagency CRE (commercial real estate) concentration guidance to provide greater clarity to examiners by updating its Concentration Risk Management handbook. The updated guidance provided nformation on identifying credit concentrations, including CRE, and assessing the quality of risk management at the examined institution.
Federal Deposit Insurance Corporation 4. To improve supervision of CRE-related risks, the Chairman of the Federal Deposit Insurance Corporation, the Chairman of the Board of Governors of the Federal Reserve System, and the Comptroller of the Currency, after issuing revised or supplemental CRE concentration guidance, should incorporate steps in existing review and quality assurance processes, as appropriate, to better ensure that the revised guidance is implemented consistently and that examiners clearly indicate within bank examination reports the basis for requiring a bank to reduce CRE loan concentrations.
Closed - Implemented
FDIC took steps to ensure that examiners will apply the updated guidance in a consistent manner. On November 12, 2014, FDIC conducted an examiner conference call regarding the Concentrations Memo. In July 2015, FDIC also issued a set of questions and answers about the revised Concentrations page instructions to further ensure examiners had consistent information on how to apply the instructions. The updated CRE guidance will be covered in FDIC's ongoing quality assurance program that reviews the examination process to help ensure examines apply policies and guidance consistently.
Office of the Comptroller of the Currency 5. To improve supervision of CRE-related risks, the Chairman of the Federal Deposit Insurance Corporation, the Chairman of the Board of Governors of the Federal Reserve System, and the Comptroller of the Currency, after issuing revised or supplemental CRE concentration guidance, should incorporate steps in existing review and quality assurance processes, as appropriate, to better ensure that the revised guidance is implemented consistently and that examiners clearly indicate within bank examination reports the basis for requiring a bank to reduce CRE loan concentrations.
Closed - Implemented
OCC took steps to ensure that examiners will apply the updated guidance in a consistent manner. For example, the updated CRE guidance was discussed with examiners during a nationwide conference call on March 2, 2012. OCC has an ongoing internal review and quality assurance process that reviews examiner application of policies and guidance to help ensure they are applied in a consistent manner and the updated guidance will be covered under this process.
Board of Governors 6. To improve supervision of CRE-related risks, the Chairman of the Federal Deposit Insurance Corporation, the Chairman of the Board of Governors of the Federal Reserve System, and the Comptroller of the Currency, after issuing revised or supplemental CRE concentration guidance, should incorporate steps in existing review and quality assurance processes, as appropriate, to better ensure that the revised guidance is implemented consistently and that examiners clearly indicate within bank examination reports the basis for requiring a bank to reduce CRE loan concentrations.
Closed - Implemented
To help ensure that examiners are implementing the 2006 CRE concentration guidance consistently and accurately, the Federal Reserve has developed a specific set of procedures for its examiners to use when examining banks with CRE concentrations. Reviewing the use of these procedures is part of the Federal Reserve's ongoing review process of examination reports that reviews exam findings across banks and identifies any exam issues that need to be addressed. The Federal Reserve Board also has quarterly meetings with the Reserve Banks on CRE specifically, which helps ensure that examiners are applying the CRE guidance in a consistent manner.

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