Bank regulator flashes warning light over commercial real estate

Bloomberg

A leading US banking regulator wants lenders to do more to manage their exposure to commercial real estate.
As property lending accelerates, the Office of the Comptroller of the Currency — which oversees American banks alongside the Federal Reserve Board and the Federal Deposit Insurance Corp — is actively monitoring banks’ stress tests and risk-management practices, Comptroller Thomas Curry said.
“With commercial real estate lending, we’re signaling a flashing yellow or a caution light,” Curry said. “We think that if banks act now and if supervisors are vigilant, this type of potential risk can be managed effectively.” Curry’s comments echo a report from the OCC this week that highlighted a rise in credit risk from increased lending and looser underwriting. Lending growth for large banks accelerated to 5.9 percent in 2015, up from 3.6 percent a year earlier, the regulator wrote in its report. Smaller institutions have also bulked up their loan portfolios, focusing on both commercial and residential properties, the OCC wrote.
Longer loan maturities, interest-only payment periods, and less restrictive covenants are adding to risks, the OCC wrote in its report. The regulator expressed similar concerns in December. With the credit cycle deteriorating, managing this exposure is increasingly important, Curry said.
“That’s what we’re trying to emphasize,” he said. “That if you’re going to ease underwriting standards, you’ve got to have an effective risk-management framework in place.”