St. Louis Fed Analysis: Commercial Real Estate Lending Challenges District Banks

ST. LOUIS, MO – December 24, 2009 – (RealEstateRama) — Amid ongoing deterioration in the commercial real estate (CRE) market, many community banks face the possibility of significant losses from soured loans and heightened refinancing risk in the months ahead.

The winter 2009 issue of Central Banker, the St. Louis Fed’s quarterly banking publication, focuses on how CRE lending is challenging Eighth District banks and what banks can do to help mitigate the impact of CRE lending and other troubled debt problems. The online version also offers an audiocast that features an overview from Julie Stackhouse, the St. Louis Fed’s senior vice president for banking supervision and regulation.

“Looking at bank data for 2009, we continue to see that while District banks are, for the most part, weathering the financial crisis, some are struggling significantly with asset quality issues in their commercial real estate portfolios,” Stackhouse said.

Though not as severely affected as banks elsewhere in the country, Eighth District banks have not been immune to real estate woes. As of Sept. 30, while CRE loans made up 43.5 percent of total bank loans at District banks, they accounted for 63.4 percent of all nonperforming loans. In addition, many CRE loans come due in 2010 and rising capitalization rates and loss of rents increase the risk of further deterioration in the months ahead.

“Given the experience of the past year, many banks are now reassessing their exposure to commercial real estate and reviewing their underwriting policies—trying to manage that delicate balance between operating the bank in a safe and sound manner, while continuing to serve as a vital source of credit in their communities,” Stackhouse said.

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With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation’s central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, provides payment services to financial institutions and the U.S. government, and promotes community development and financial education

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