In fact, the aggregate CRE concentrations for small-to-medium-sized U.S. banks, relative to capital, are now twice the exposures before the substantial real estate downturn in the late 1980s. As supervisors, we want to ensure that risk management practices and capital levels are appropriate given the level of concentrations, and that institutions have thought through the possible consequences of a market downturn in CRE.
U.S. regulators recently issued for comment proposed new guidance for examiners on CRE. Historically, CRE has been a highly volatile asset class. Borrowers and bankers with properties in distress can disrupt their local real estate market by cutting rents or offering leasehold improvements and other incentives to attract or keep tenants in an effort to generate cash flow.