Concentration Risk Chicago Region Banker Workshop Series

Transcription

1 Concentration Risk 2016 Chicago Region Banker Workshop Series

2 Objectives The Regulatory Perspective Identifying Concentrations Risk Management Practices Supervisory Treatment Outstanding Guidance 2

3 Definition What is a concentration? 3

4 Regulatory Perspective Lessons Learned Bank Failures Level and Trend 4

5 Lessons Learned Causes and Consequences of Recent Bank Failures The failures of the smaller banks (those with less than $1 billion in assets) were largely driven by credit losses on commercial real estate loans. The failed banks also had often pursued aggressive growth strategies using nontraditional, riskier funding sources and exhibited weak underwriting and credit administration practices. The rapid growth of commercial real estate portfolios led to high concentrations that increased the banks exposure to the sustained real estate and economic downturn that began in GAO-13-71, Financial Institutions: Causes and Consequences of Recent Bank Failures 5

6 Bank Failures Nationally, over 500 institutions failed. Georgia, Florida, California, and Illinois had the most failures. Look Back Reports Office of Inspector General US Government Accountability Office Chicago Region Failures from 2007 to Present IL IN KY MI OH WI 6 Information obtained from

7 Specific Examples from the Region* $1.8 billion institution in Michigan Concentrations in CRE/ADC and private label CMOs Increase in brokered deposits to fund growth 117% ADC/Total Capital; 376% CRE/Total Capital 7 *Information obtained from OIG Material Loss Reviews

8 Specific Examples from the Region* $1.7 billion institution in Illinois Concentrations in CRE/ADC Out-of-area loan participations and brokered loans Volatile funding sources 8 *Information obtained from OIG Material Loss Reviews

9 Percentage of Banks with Commercial Real Estate Loan Concentrations % 40-49% 50-59% 60-69% +75% 9 Source: FDIC

10 What did 2015 look like? % 40-49% 50-59% 60-69% +75% 10 Source: FDIC

11 Growth in CRE By Component Billions $2,000 Total Commercial Real Estate By Component $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $- Total CRE ($) Total ADC ($) Total Multifamily ($) Total Non-Farm Non- Residential ($) Total Owner Occupied Non- Farm Non-Residential ($) The breakout for Owner-Occupied was not available in the Call Reports until Source: FDIC Note: Data through December 31, 2015.

12 Oil Industry The Oil Industry Has Been Significantly Impacted By Low Prices OSP: WTI-Cushing; OK-FOB (USD per Barrel, NSA) for US - Jan 2002 Jan 2003 Jan 2004 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan Source: US Energy Information Administration: Petroleum Weekly Release

13 Percentage of Banks with One or More Types of Funding Concentrations < 25% 25-49% +50% Funding Concentration: Single funding source >10% of total assets or aggregate potentially volatile funding sources > 25% of total assets. 13 Source: FDIC

14 Identifying Concentrations Does my bank have concentrations? 14

15 Group Assets With Similar Risk Factors Industry Type of Collateral Other Common Risk Factors Product Line Repayment Source 15

16 Diversification? Owner Occupied CRE Commercial Real Estate By Collateral Type Multifamily Other Non- Owner Occupied CRE Office Hotel Other Farmland ADC Sublimits are needed. 16

17 Can 1-4 Family Residential Loans be considered a concentration? A. Yes B. No 0% 0% Yes No 17

18 Frequently Asked Questions Can 1-4 family residential loans be considered a concentration? Yes, but only if the portfolio, or one or more segments, share common higher-risk characteristics such as subprime, high loan-to-value ratios, and/or nontraditional mortgages. 18

19 Can owner-occupied CRE be considered a concentration? A. Yes B. No 0% 0% Yes No 19

20 Frequently Asked Questions What about owner-occupied commercial real estate? Yes. Owner occupied CRE and non-owner occupied CRE may be combined if they share similar risk characteristics, which could include geography, product line, collateral type (e.g., retail, office, industrial), or industry (e.g., energy, healthcare practices, or tourism). 20

21 Can unfunded commitments be included? A. Yes B. No 0% 0% Yes No 21

22 Frequently Asked Questions Are unfunded commitments included? They can be included. The impact of unfunded commitments on risk should be considered by management and examiners. 22

23 Can loans with guarantees from the Farm Service Agency or SBA be a concentration? A. Yes B. No 0% 0% Yes No 23

24 Frequently Asked Questions What about loans with guarantees from the Farm Service Agency or the Small Business Association? Yes, they can be considered a concentration. Guarantees do not free the bank of responsibilities with the credit. Include the full balance and address the guarantee in a qualitative analysis. 24

25 Questions? 25

26 Identifying Funding Concentrations Brokered deposits Large depositors High-rate deposits Internet-listing-service deposits Federal funds purchased Borrowings Other 26

27 Identifying Funding Concentrations Are those funding sources automatically considered volatile??? 27

28 Risk Management Program Board and Management Oversight Policies, Procedures, and Risk Limits Management Information Systems (MIS) Measuring and Monitoring Systems 28

29 Risk Management Program Risk Stratification and Vulnerability Assessment Market Analysis Contingency Planning 29

30 Report of Examination Treatment A Concentrations page will be included in Reports of Examination when concentrations exceed established concentration thresholds or when examiners determine inclusion is warranted. Examiners may prepare a written analysis describing the concentration and management s risk management practices. 30

31 Report of Examination Thresholds Asset Category Thresholds 25% Total Capital (loans) or Tier 1 Capital (non-loans) Individual borrower Small or Interrelated group of individuals Single repayment source with normal credit risk or greater Individual project 100% or more of Total Capital (loans) or Tier 1 Capital (non-loans) Industry Product line Type of collateral Short-term obligation of one financial institution or affiliated group 31

32 Report of Examination Thresholds Funding Thresholds 10% Total Assets Single Funding source 25% Total Assets Aggregate potentially volatile funding sources The Report of Examination Concentrations page now lists funding concentrations. 32

33 Resources RMS Manual of Examination Policies, Sections 3.2 Financial Institution Letters Funding and Liquidity Risk Management - Interagency Guidance (FIL ) Correspondent Concentration Risks - Interagency Guidance (FIL ) Managing Commercial Real Estate Concentrations in a Challenging Environment (FIL ) Commercial Real Estate Lending - Joint Guidance (FIL ) Supervisory Insights Journal Stress Testing Credit Risk at Community Banks (Summer 2012) Managing Agricultural Credit Concentrations (Winter 2010) Managing Commercial Real Estate Concentrations (Winter 2007) Directors Resource Center: 33

34 Objectives The Regulatory Perspective Identifying Concentrations Risk Management Practices Supervisory Treatment Outstanding Guidance 34

35 Questions? 35