Credit Risk Management: Early & Accurate Risk Ratings

The FDIC 2024 Risk Review noted that “risk ratings may see a deterioration as a result of the refinancing of commercial real estate (CRE) loans.” The rising trend in delinquencies and lower occupancy in certain sectors, coupled with softening collateral values, could weaken CRE loan portfolios, particularly from loans coming due during this period of higher interest rates.

Borrowers could face difficulties refinancing properties due to higher borrowing costs, which may affect repayment capacity and lower collateral values—two essential components considered by lenders. With an estimated $1.6 trillion in CRE loans maturing between 2024 and 2026, accurate risk ratings are instrumental in managing current portfolio risks while helping develop strategies for loan growth in asset classes preferred by your institution.

In fact, the Office of the Comptroller of the Currency (OCC) Semiannual Spring Risk Perspective from the National Risk Committee reported that “it is crucial that banks establish an appropriate risk culture that identifies potential risk, particularly before times of stress. The ability to proactively understand and respond to potential increased credit risk during times of stress remains a prudent resilience-planning component. Recognizing concentrations early and developing effective strategies for managing concentration risk enhance financial resilience.” The OCC indicated that commercial credit risk remains moderate although it shows signs of increasing.

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