Banks with higher concentrations of commercial real estate (CRE) lending have higher failure rates, according to a ""report"":http://www.occ.gov/news-issuances/news-releases/2013/nr-occ-2013-59a.pdf from the ""Office of the Comptroller of the Currency (OCC)"":http://www.occ.gov/ and the ""Federal Reserve Board."":http://www.federalreserve.gov/
[IMAGE]The OCC studied the prevalence of bank failures from 2008 through 2011 with particular focus on banks that exceeded the 2006 guidelines regarding CRE and construction lending.
The 2006 guidelines set concentration levels of 100 percent or more of a bank's risk-based capital for construction, land, and land development (CLD) lending and 300 percent or more for CRE lending.
Regulators advise banks that exceed these levels to adopt ""enhanced credit risk controls, including stress testing.""
[COLUMN_BREAK]The levels do not serve as defined limits for the industry.
The OCC and Federal Reserve found banks that exceeded these regulatory levels were more likely to fail than those that did not. Banks that exceeded both levels had a failure rate of 23 percent from 2008 through 2011, while banks that exceeded neither level had a failure rate of 0.5 percent.
Banks that exceeded CDE levels had a failure rate of 13 percent and were responsible for a majority of the losses the ""FDIC"":http://www.fdic.gov/ faced from 2007 to 2011. In fact, 80 percent of losses can be attributed to banks that exceeded CDE criteria.
Of the remaining surviving banks that exceeded the CDE levels, 60 percent were in ""poor condition"" in 2011.
When regulators introduced the CRE and CDE levels in 2006, about 31 percent of commercial banks exceeded one or both levels. These banks accounted for 40 percent of all CRE loans in the market at the time.
However, by 2011, only 11 percent of commercial banks exceeded one or both levels. This 11 percent, however, continued to hold about 34 percent of all CRE loans.
While some banks have decreased their concentrations of CRE and/or CDE loans since 2006, the OCC report notes, ""A non-trivial number of banks exceeding the supervisory criteria on concentration levels in 2007 continued to increase their CRE concentrations through 2011.""