Banks with a high amount of commercial real estate loans are coming under closer scrutiny from the Federal Deposit Insurance Corp. The FDIC recently announced its plans to increase stress testing on banks with CRE loans, citing uncertainty from work and commerce since the pandemic started.
The FDIC will sharpen its focus on new commercial real estate lending activity, along with subsectors and geographic areas under stress, according to its Summer 2022 Supervisory Insight bulletin. Most banks supervised by FDIC are smaller institutions, which also have loaned an enormous amount to the commercial real estate industry. FDIC-supervised banks held 41 percent of the $2.7 trillion in commercial real estate loans over the past year.
Several regional banks are also being more cautious and looking for weak points in the commercial real estate industry, leading to a slowdown in lending. According to Trepp data, bank lending to CRE fell by more than $8 billion between the first and second quarters of this year, mainly because of interest rate hikes and labor supply constraints. Total commercial mortgage borrowing and lending is projected to fall 18 percent this year compared to 2021, according to the Mortgage Bankers Association.