In the late 1980s and early 1990s, the concentration level for this same bank group was about 150 percent, or half the current level. Therefore, banks should not be surprised by the emphasis in the proposed CRE guidance on concentrations and the importance of portfolio risk management. Historically, CRE has been a highly volatile asset class.
In the past, problems in CRE, even at wellmanaged banks, have generally come at times when the broader market was encountering difficulties. In an effort to generate cash flow, borrowers and bankers with properties in distress may disrupt their local real estate market by cutting rents or offering leasehold improvements and other incentives to attract or keep tenants.