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Excessive commercial, construction lending tripped up banks

Banks that exceeded recommended construction and commercial real estate lending guidelines suffered the most during the 2008-2011 economic downturn, according to a new research report published by the Comptroller of the Currency and Federal Reserve.

Several years ago, guidance released to banks said those exceeding a CRE lending concentration level of 300% or more of the bank’s total risk-based capital faced greater credit risks.

The same guidelines noted banks with construction loans making up more than a 100% of the institution's total risk-based capital should put in place enhanced credit-risk controls.

This week, the OCC and the Federal Reserve concluded that 13% of the banks that exceeded the 100% recommended threshold for construction lending failed during the downturn. And of those that exceeded both the CRE and construction lending guidelines, 23% failed during the three-year period running from 2008 through 2011.

About 80% of the losses covered by the FDIC insurance fund from 2007 to 2011 can be attributed to banks exceeding the recommended 100% construction criteria, OCC said.

Meanwhile, the OCC report claims, "Banks that were public stock companies and exceeded the supervisory criteria on CRE concentrations tended to experience greater deterioration in condition than banks below the criteria, as assessed by market participants. Banks with CRE concentrations higher than the guidance criteria experienced larger declines in their market capital ratio during the recent economic downturn."

Click here to read the full report.

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