Regulators Outline Risk Management Practices of Successful Banks

The December regulatory statement on CRE challenges outlined how banks can survive an economic downturn, even with concentrations. The regulators advised that they expect bank boards to be involved in setting proper risk management policies and procedures.  Boards of directors or the appropriate board committee must approve concentration limits and review credit risk management practices and underwriting standards.

Successful banks also:

• Conducted global cash flow analyses based on reasonable assumptions of rent and other items to ensure borrowers could repay their loans;
• Performed stress testing of their CRE loan portfolios to quantify the impact of changing conditions on asset quality, earnings and capital;
• Had lending strategies and limits for concentrations, as well as a method to assess whether those strategies would work in different market conditions;
• Gave boards adequate reports on those lending strategies so they could assess how they would change in a downturn;
• Continued to monitor a borrower’s ability to service debt as loans converted from interest-only to amortizing payments, or as interest rates rose;
• Implemented procedures to monitor the volatility in supply and demand for CRE during business cycles;
• Maintained management information systems that gave the board and management enough information to identify, measure, monitor and manage concentration risk;
• Had processes to review appraisal reports to support appropriate market value conclusions.