The agency issued a letter of caution to banks and set up a follow-up meeting with regulators and more than a dozen bankers in Seattle. The warning underscores the looming fear that an economic downturn, or a real estate bubble, could create serious problems for banks that rely heavily on loans with commercial real estate as collateral.
To be sure, banks that have done a good job of underwriting their loans are less likely to face any problems if market conditions change, no matter what their portfolio's emphasis on real estate. And for the moment at least, commercial real estate markets in the Puget Sound area are stabilizing and the local housing market remains red hot.
But with interest rates on the rise, the specter of a real estate slowdown looms on the horizon. And regulators are concerned enough that they are strongly advising banks to take a close look at their portfolios and policies.
The Federal Deposit Insurance Corp. (FDIC), the federal agency that regulates banks, sent a March 4 letter to banks in the San Francisco region, which includes Washington and 10 other Western states, warning about the heavy concentration in commercial real estate (CRE) loans.
The letter outlined a series of "best practices" for banks, which include segmenting different loan categories, keeping a close eye on local real estate markets, and making timely reports to bank directors about loan concentrations.
Regulators also met privately with a group of 15 bankers in Seattle this month to convey their concerns about commercial real estate. Hall said another meeting is planned for Washington, though no date or location has been set yet.
The commercial real estate loan category used by the FDIC includes real estate-secured construction and development loans, as well as loans secured by multifamily, office, industrial, retail and hotel properties.
The FDIC letter said regulators may submit banks with high commercial real estate concentrations to additional reviews during their annual examinations.
The agency said it would "typically" apply such additional reviews to banks that have a ratio of commercial real estate loans-to-Tier 1 Capital of 300 percent or higher. The ratio measures commercial real estate against the level of core capital available to absorb losses in that category.
Regulators have their work cut out for them. In Washington, fully two-thirds of the nearly 100 state banks have commercial real estate loan-to-Tier 1 Capital ratios of over 300 percent, according to FDIC data.
Topping the list is Heritage Bank of Olympia with 832.6 percent, followed by Frontier Bank (697.5 percent), Golf Savings Bank (683.2 percent) and North County Bank of Arlington (680.7 percent).
Seattle-based Washington Mutual Bank and other thrifts such as Washington Federal Savings are at the bottom of the list, primarily because they do less commercial real estate lending relative to their capital than some of the community banks.
