Seal of the Board of Governors of the Federal Reserve System
WASHINGTON, D. C.  20551
SR 07-1
January 4, 2007

SUBJECT:  Interagency Guidance on Concentrations in Commercial Real Estate

On December 6, 2006, the Federal Reserve and the other federal banking regulatory agencies issued interagency guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices.1  Attachment 1 provides the Federal Register notice of the guidance.2  Attachment 2 provides the interagency guidance. The guidance is applicable to state member banks and broadly applicable to bank holding companies and their non-bank subsidiaries.


Over the past several years, the agencies have observed that commercial real estate lending (CRE) concentrations have been rising at many institutions, especially small-to-medium-sized institutions. While most institutions' underwriting practices are sound, the agencies have observed that some institutions' risk management practices and capital levels have not evolved with the level and nature of their CRE concentrations. Therefore, the agencies issued the guidance to remind institutions that strong risk management practices and appropriate levels of capital are important elements of a sound CRE lending program, especially when an institution has a CRE concentration or a CRE lending strategy leading to a concentration.


The guidance provides a principle-based discussion of supervisory expectations for sound risk management practices and evaluation of capital adequacy. As such, the guidance is not intended to be implemented through a "one-size-fits-all" supervisory approach. Rather, examiners are expected to exercise judgment when evaluating the appropriateness of an institution's risk management practices and capital levels relative to the size and complexity of its CRE portfolio and level and nature of CRE concentration risk.


The guidance applies to concentrations in CRE loans sensitive to the cyclicality of CRE markets. For purposes of this guidance, CRE loans include loans where repayment is dependent on the rental income or the sale or refinancing of the real estate held as collateral. The guidance does not apply to loans where real estate is taken as a secondary source of repayment or through an abundance of caution.

The guidance notes that risk characteristics vary among CRE loans secured by different property types. A manageable level of CRE concentration risk will vary depending on the portfolio risk characteristics, the quality of risk management processes, and the level of capital. Therefore, the guidance does not establish a CRE concentration limit that applies to all institutions. Rather, the guidance encourages institutions to perform ongoing risk assessments to identify and monitor CRE concentrations. These risk assessments will be an important consideration in an examiner's review of an institution's CRE lending activity and concentration risk.

The guidance provides numerical indicators as supervisory screening criteria to identify institutions that may have CRE concentrations that warrant greater supervisory scrutiny. The screening criteria should serve as a starting point for a dialogue between the supervisory staff and an institution's management about the level and nature of the institution's CRE concentration risk.

The supervisory screening criteria are not intended to be viewed as a "safe harbor" if other risk indicators are present. For example, institutions experiencing recent, significant growth in CRE lending may receive closer supervisory review than other institutions regardless of their level of CRE concentration. Similarly, institutions with CRE levels below the screening criteria but with high risk profiles may also be subject to closer supervisory review.


The guidance is effective as of December 12, 2006, the date of issuance in the Federal Register. However, institutions needing to improve their risk management processes may be granted some flexibility on the timeframe for complying with the guidance. This timeframe should be commensurate with the level and nature of CRE concentration risk, the quality of the institution's existing risk management practices, and its levels of capital. To ensure consistent and appropriate application of this guidance, the Federal Reserve is developing training materials for examiners addressing the guidance. These training materials will include FAQs and updates to examination manuals and training course materials.

Reserve Banks are asked to distribute this SR letter to state member banks and bank holding companies in their districts, as well as to their supervisory and examination staff and the state banking departments in their districts. Questions may be addressed to the following contacts in the Board's Division of Banking Supervision and Regulation: Sabeth Siddique, Assistant Director, Credit Risk, (202) 452-3861, Denise Dittrich, Supervisory Financial Analyst, (202) 452-2783, or Virginia Gibbs, Senior Supervisory Financial Analyst, (202) 452-2521.

Roger T. Cole

  1. Federal Register Notice (84 KB PDF)
  2. Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices (530 KB PDF)

  1. The Office of Thrift Supervision issued similar guidance for thrift institutions.  Return to text
  2. See 71 FR 74580 (December 12, 2006).  Return to text

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