WASHINGTON -- Banks with highly concentrated levels of commercial real estate loans in their portfolios, will be subject to scrutiny under final guidelines released Dec. 6 by industry regulators.

The guidelines were jointly issued by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corp. and sets forth sound risk management practices that an institution should employ when it has CRE concentration risk, according to the regulators. Credit concentrations are broadly defined as groups or classes of credit exposures that share common risk characteristics or sensitivities to economic, financial, or business developments. The agencies said they would use certain criteria to identify institutions that are potentially exposed to significant CRE concentration risk. Criteria include institutions that have experienced rapid growth in CRE lending, have notable exposure to a specific type of CRE, or are approaching or exceed the following supervisory criteria may be identified for further supervisory analysis to assess the nature and risk posed by the concentration: total reported loans for construction, land development, and other land loans represent 100% or more of the institution's total risk-based capital; or if total commercial real estate loans, represent 300% or more of the institution's total risk-based capital. If the outstanding balance of the institution's commercial real estate loan portfolio has increased by 50% or more during the prior 36 months, the agencies will also take a look at lending activity.

The regulators issued proposed guidelines in January in large part because of the increased concentrations in CRE, especially among small to midsized banks. The regulators were concerned that rising CRE loan concentrations "may expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in commercial real estate markets."

Since then, there have been some revisions to the guidelines with the final model emphasizing the guidance does not limit banks' CRE lending, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations, the regulators said. The guidelines also focus on commercial real estate loans that are dependent upon the cash flow from real estate held as collateral and sensitive to conditions in the commercial real estate market.

The Independent Community Bankers of America has said the guidelines could be "detrimental" to communities in the long run.

"Whether the guidance will be detrimental or not depends on how examiners apply it and how community banks react to the guidance," said Karen Thomas, ICBA executive vice president and director of government relations. "If it causes community banks to pull back unnecessarily from sound commercial real estate lending activities, it would harm the nation's economy--the opposite of what the guidance attempts to achieve."

The banking trade group said it would have preferred that "regulators simply rely on existing standards which have proven to be effective in steering banks through weak commercial real estate markets."

CUNA, which typically doesn't comment on proposed banking regulations, has previously said the guidelines are "a common sense approach to protect the safety and soundness of the banking system." CUNA specifically pointed to the bank and savings and loan crisis in the 1980's and early '90s as "the most notorious" example of how lax supervision by federal banking regulators has cost the economy hundreds of billions of dollars in taxpayer funds for a bailout of troubled banks and thrifts," said CUNA President/CEO Dan Mica in an April 14 comment letter. The guidelines do not impact credit unions.

Meanwhile, bank regulators have continued to clarify that the guidance is not intended to apply to loans where commercial real estate collateral is taken as a secondary source of repayment or through an abundance of caution and that numerical screening criteria will be used as a supervisory monitoring tool to focus supervisory resources on institutions that may have significant commercial real estate loan concentration risk. A loan growth screen has been added to identify institutions with both high commercial real estate concentrations and recent rapid increases in these portfolios, the regulators added.

The Office of Thrift Supervision issued guidelines, but did not include any specific thresholds. The American Bankers Association has told banks to follow OTS guidelines. [email protected]