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CRE: Income Property Loan Conditions and Stress Testing Expectations

October 27, 2011

This presentation discusses conditions and outlook with respect to bank income property lending (focusing primarily on banks within the 12th Federal Reserve District) as well as regulatory expectations and issues that should be considered as bank managers build or enhance their CRE stress testing processes.

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Credit losses on income property loans climbed sharply in 2009 and 2010, but loss rates generally remained at very manageable levels. With CRE market conditions still weak, bank credit losses on these loans could climb to higher levels in the next few years. At the same time, bank supervisors’ expectations remain heightened and there remains uncertainty in the area of CRE stress testing. Institutions with sizeable concentrations of CRE loans should have comprehensive CRE stress testing processes in place, and, in fact, sound stress testing processes are critical to an institution’s CRE risk management framework.

Our two speakers from the San Francisco Fed’s Division of Banking Supervision & Regulation-Gary Palmer, Manager, Risk Analytics & Monitoring, and Wallace Young, Director, Risk Coordination-will examine market conditions in commercial real estate and supervisory expectations and issues that should be considered as bank managers build or enhance their CRE stress testing processes.