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An Analysis of the Impact of the Commercial Real Estate Concentration Guidance

Part 3: The Impact of CRE Concentrations on Bank Failures

One of the concerns that spurred issuance of the guidance was that institutions with high CRE concentration levels that lack the strong risk-management practices required by the guidance are more vulnerable during economic downturns and more likely to fail. To test the validity of this concern, we analyzed the 7,379 active commercial bank charters from March 31, 2007, to September 30, 2011, to determine whether institutions exceeding the supervisory criteria concentration levels defined in the guidance actually were more likely to fail.7 We took a snapshot of banks on March 31, 2007, and performed our analysis using the concentration levels specified in the supervisory criteria.

We categorized each bank according to whether or not it exceeded the supervisory criteria concentration levels, its Tier 1 capital ratio, and other characteristics on March 31, 2007. We tracked the banks through September 30, 2011, without regard to any actions taken in the interim.Figure 3 summarizes our findings.

Figure 3. Bank failure rates by supervisory criteria
Our analysis tracks 7,379 active national and state-chartered banks between March 31, 2007, and September 30, 2011, and calculates rates of failure relative to supervisory criteria on CRE concentration levels

Supervisory criteria Number of banks 1 Failure rate (percent)
Does not meet or exceed either supervisory criteria 3,755 0.5
Meets or exceeds both supervisory criteria 772 22.9
CLD 100 is percent or more of total risk-based capital 2 1,909 13.0
Total CRE is 300 percent or more of capital and CRE portfolio meets growth component in second supervisory criteria 890 20.6
Total CRE is 300 percent or more 1,310 16.3
Total CRE 36-month growth rate is 50 percent or more 2,819 9.9
Total CRE is 300 percent or more of capital and 36-month growth rate is 50 percent or more, but CLD is below 100 percent 118 5.1
CRE portfolio meets 36-month period growth criteria, but CLD is below 100 percent and total CRE is below 300 percent 1,496 4.8

Note: Ratio values used were a snapshot as of March 31, 2007. Excludes owner-occupied, non-farm, non-residential CRE. Growth was determined using total CRE on a call report basis since owner-occupied could not be eliminated, lacking data prior to 2007.

1.  Components do not add to total because of overlapping criteria, bank mergers, or other eliminations.   Return to table

2.  Banks meeting or exceeding the CLD concentration levels are estimated to have resulted in 80 percent of losses to the FDIC insurance fund between 2007 and 2011. Banks in this category that did survive to September 30, 2011, mostly have CAMELS ratings of 3, 4, or 5, based on national bank data.   Return to table

Source: OCC, Federal Financial Institutions Examination Council (FFIEC) call report data

There is a major difference in the failure rates for banks above and below the concentration levels specified in the supervisory criteria. Of the banks that met or exceeded both concentration levels and the growth component in the supervisory criteria, 22.9 percent failed. In contrast, only 0.5 percent of banks that had concentration levels lower than those in the supervisory criteria failed.

We extended our analysis to include other factors that might contribute to higher failure rates. These factors include banks with a low Tier 1 capital ratio, a high dependency on brokered deposits, and proximity to markets experiencing the most intense downturns. None of these factors had as strong an impact in determining risk of failure as CLD concentration levels.

Most bank failures were seen in banks that had CLD concentration levels greater than 100 percent of capital. Some 13 percent of the 1,909 banks (charters) with CLD-to-total risk-based capital ratios higher than 100 percent failed. Roughly 60 percent of the survivors in the same category with high CLD concentration levels as of September 30, 2011, were in poor condition, receiving CAMELS ratings of 3, 4, or 5.8 Using FDIC data, we estimate that 80 percent of total FDIC insurance fund costs from this period are associated with banks whose CLD lending was 100 percent or more of total risk-based capital.9 The nature of CLD lending is that risks are higher than for other types of CRE lending; historically, net charge-off rates for CLD lending have been much higher than for commercial mortgage finance.

About 21 percent of the 890 banks exceeding the concentration levels in the total CRE concentration criterion, which incorporates both CLD and non-owner-occupied commercial mortgage CRE concentration and the 50 percent growth in CRE portfolio component, failed. If the CRE growth component is disregarded, the failure rate for this group of banks falls to 16.3 percent. The total CRE supervisory criterion, however, overlaps with the first criterion on CLD concentration levels, because CLD loans are also included in the non-owner-occupied CRE ratio calculation. When restricting the sample to banks that exceeded the total CRE concentration level--but remained below the 100 percent CLD concentration level--and had less than 50 percent CRE growth during the previous 36 months, 4.6 percent failed. While this failure rate is higher than that of banks that met or exceeded none of the criteria (0.5 percent), it is considerably lower than the failure rate among banks that exceeded the supervisory criteria on CLD concentration levels.

Banks with total CRE growth greater than 50 percent, ignoring for the moment other components of the supervisory criteria, saw a failure rate of 9.9 percent. Restricting this sample further, to just those banks whose concentration levels are below those specified in the supervisory criteria, the failure rate falls to 4.8 percent. While this failure rate is higher than that of banks that met none of the criteria (0.5 percent), it is also considerably lower than the failure rate among banks that exceeded the CLD concentration levels. Nevertheless, rapid portfolio growth is a longstanding warning signal that a bank's risk management and underwriting standards may be failing to recognize a build-up of risk within the bank.

Our analysis emphasizes the effect of CRE concentrations--in particular, concentrations in CLD loans--on the probability of bank failure.Figure 4 provides detailed results of our analysis of the relationship between CRE concentration levels and bank failure.

Figure 4. Failure rate by construction and land development exposure to capital and failure rate by total CRE exposure to capital

Accessible Version |  Return to text

Source: OCC staff analysis

In figure 4, the top bar chart shows failure rates by the ratio of CLD loans to capital. The failure rate is about 2 percent when CLD concentration levels are below 100 percent of total risk-based capital. For banks in a range of 100 to 200 percent CLD exposure, the failure rate rises to 6 percent. The failure rate rises even more sharply--to 46 percent--for banks whose CLD concentration levels are more than 400 percent of total risk-based capital.

This trend shows that supervisory expectations for higher capital may play a crucial role. As banks increase their CLD concentration levels to more than 100 percent but less than 200 percent of total capital, banks with Tier 1 capital ratios exceeding critical levels experienced lower failure rates.10 When CLD concentration levels rose beyond 200 percent of capital, elevated levels of capital reduced failures but did not prevent failure rates from rising sharply.

The bottom bar chart in figure 4 presents a similar analysis using the ratio of non-owner-occupied CRE loans to capital. The failure rates increase as total CRE concentrations rise, but not as drastically when CLD-only concentrations increase. In addition, the inclusion of CLD loans in the non-owner-occupied CRE criteria results in increased CLD concentrations also contributing to overall CRE concentrations. This finding is consistent with the net charge-off rates presented in figure 1, showing significantly higher loss rates among CLD loans.


7. The three-month period ending March 31, 2007, is the first quarter for which call reports included details adequate to test the guidance criteria. Before that date, owner-occupied and non-owner-occupied commercial mortgages were not reported separately.  Return to text

8. CAMELS (Capital, Assets, Management, Earnings, Liquidity, and Sensitivity) is a rating system employed by banking regulators to assess the soundness of commercial banks. Ratings of 3, 4, or 5 may subject banks to enforcement actions, enhanced monitoring, and limitations on expansion. CAMELS ratings were available only for a sample subset of national banks; state charter CAMELS were not available for this analysis.  Return to text

9. A list of failed banks and assisted transactions is available on As of November 15, 2011, and covering the period dating from March 31, 2007, 352 failed banking institutions (excluding savings charters) were identified by certificate number. Of these, the FDIC published loss estimates on 272 (up to December 31, 2010) at the time of the research. Loss estimates ranged from 3 to 61 percent of the banks' total assets. For the 272 banks, approximately 80 percent of the total estimated losses were for banks exceeding the 100 percent CLD concentration level. The mean loss percentage of total assets was 29.0 percent, and the median loss percentage of the 272 banks was 27.9 percent of total assets. The median of 27.9 percent was applied as an estimate for the 80 banks for which the FDIC provided no loss estimate. For the 352 failed banks as estimated, approximately 80 percent of the estimated total losses were in banks exceeding the 100 percent CLD concentration level.  Return to text

10. Staff analysis not reported in this paper found that the critical level for the Tier 1 capital ratio for this subset of institutions was 11 percent. Additional analysis is available from the authors upon request.  Return to text

Last update: May 2, 2013

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