After on-the-ground supervisors reported seeing increases in CRE concentrations at many institutions across the country, supervisors examined historical data on risks associated with CRE concentrations to provide the basis for developing supervisory guidance. That guidance counseled banking organizations with high CRE exposures relative to capital to engage in stress testing to evaluate behavior of those exposures and the impact on capital in adverse circumstances.
Some financial institutions already employ stress tests, but they should re-check their robustness in light of recent events. For example, banking organizations might benefit from expanding tests to include a wider set of variables to stress and to consider shocks they might have considered much less probable one or two years ago.